<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1997
REGISTRATION NO. 33-92548
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. TWO
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CRESCENT REAL ESTATE EQUITIES TRUST
(formerly known as Crescent Real Estate Equities, Inc.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
TEXAS 52-1862813
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
777 MAIN STREET
SUITE 2100
FORT WORTH, TEXAS 76102
TELEPHONE: (817) 878-0477
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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GERALD W. HADDOCK
CRESCENT REAL ESTATE EQUITIES TRUST
777 MAIN STREET, SUITE 2100
FORT WORTH, TEXAS 76102
TELEPHONE: (817) 877-0477
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
<TABLE>
<S> <C>
ROBERT B. ROBBINS, ESQ. DAVID M. DEAN, ESQ.
SHAW, PITTMAN, POTTS & TROWBRIDGE CRESCENT REAL ESTATE EQUITIES TRUST
2300 N STREET, N.W. 777 MAIN STREET, SUITE 2100
WASHINGTON, D.C. 20037 FORT WORTH, TEXAS 76102
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
From time to time after the effective date of the Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
of the Securities Act of 1933, please check the following box. [ ]
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<PAGE> 2
PROSPECTUS SUBJECT TO COMPLETION
DATED JANUARY 14, 1997
9,598,216 SHARES
CRESCENT
REAL ESTATE EQUITIES TRUST
COMMON SHARES
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Crescent Real Estate Equities Trust (the "Company") is a fully integrated
real estate company operating as a real estate investment trust ("REIT"). The
Company, through its subsidiaries, directly or indirectly owns a portfolio of
real estate assets located primarily in 16 metropolitan submarkets in Texas and
Colorado. The portfolio includes 53 office properties with an aggregate of
approximately 16.3 million net rentable square feet, four full-service hotels
with a total of 1,471 rooms, two destination health and fitness resorts, six
retail properties and economic interests in three residential development
corporations.
This Prospectus relates to (i) the possible issuance by the Company of up to
6,474,288 common shares (the "Original Exchange Shares") of beneficial interest,
par value $.01 per share ("Common Shares"), of the Company if, and to the extent
that, holders of up to 6,474,288 units (the "Original Units") of limited
partnership interest ("Units") in Crescent Real Estate Equities Limited
Partnership (the "Operating Partnership") tender such Original Units in exchange
for Common Shares, (ii) the offer and sale from time to time of up to 2,017,392
outstanding Common Shares (the "Original Shares") by the holders thereof, (iii)
the possible distribution of up to 617,392 Original Shares if, and to the extent
that, the holder thereof (which is a limited partnership) distributes such
Original Shares pro rata to its partners as part of the liquidation and winding
up of the affairs of such holder, (iv) the possible issuance by the Company of
up to 1,097,014 shares (the "RER Exchange Shares") if, and to the extent that,
the holder of up to 1,097,014 Units (the "RER Units") tenders such RER Units in
exchange for Common Shares, (v) the possible issuance by the Company of up to
9,522 shares (the "JME Exchange Shares") if, and to the extent that, the holder
of up to 9,522 Units (the "JME Units") tenders such JME Units in exchange for
Common Shares, and (vi) the offer and sale or other distribution from time to
time by the holders thereof (the "Selling Shareholders") of any Original
Exchange Shares, RER Exchange Shares and JME Exchange Shares (collectively, the
"Exchange Shares") and any Original Shares (collectively with the Exchange
Shares, the "Secondary Shares"). The Original Units and the Original Shares were
issued (or reserved for issuance) in connection with the formation of the
Company and the Company's initial public offering. The RER Units were issued, in
a private placement in April 1995 to an affiliate of Richard E. Rainwater, the
Chairman of the Board of Trust Managers, and the issuance of Common Shares upon
any exchange thereof was approved by the shareholders of the Company at its
Annual Meeting held on June 12, 1995. The JME Units were issued to an employee
of the general partner of the Operating Partnership in a private placement in
May 1995. The Company has registered the Original Shares and the Exchange Shares
to provide the Selling Shareholders with freely tradeable securities, but the
registration of such shares does not necessarily mean that any of such shares
will be offered or sold by the Selling Shareholders. See "The Company" and
"Registration Rights." Of the Common Shares to which this Prospectus relates,
had been sold as of , 1997. A portion of the Original
Units and all of the RER Units and JME Units have been exchanged for Common
Shares, and a portion of the Original Shares and Original Units have been
distributed as of , 1997. See "Selling Shareholders."
SEE "RISK FACTORS" AT PAGE 5 FOR CERTAIN FACTORS RELEVANT TO AN INVESTMENT
IN THE COMMON SHARES.
The Common Shares are listed on the New York Stock Exchange under the symbol
"CEI." To ensure that the Company maintains its qualification as a REIT for
federal income tax purposes, ownership by any person generally is limited to
8.0% of the issued and outstanding Common Shares. See "Description of Shares of
the Company."
The Selling Shareholders from time to time may offer and sell Secondary
Shares held by them directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the name of any agent or
broker-dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution." Each of the
Selling Shareholders reserves the sole right to accept or reject, in whole or in
part, any proposed purchase of the Secondary Shares to be made directly or
through agents.
The Selling Shareholders and any agents or broker-dealers that participate
with the Selling Shareholders in the distribution of Secondary Shares may be
deemed to be "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any commissions received by them and any
profit on the resale of the Secondary Shares may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Registration Rights" for
indemnification arrangements between the Company and the Selling Shareholders.
The Company will not receive any proceeds from the issuance of the Exchange
Shares or the sale of any Secondary Shares by the Selling Shareholders but has
agreed to bear certain expenses of registration of the Secondary Shares under
federal and state securities laws, not including commissions and discounts of
agents or broker-dealers and transfer taxes, if any. The Company's interest in
the Operating Partnership will increase in connection with any issuance by the
Company of Exchange Shares to Unit holders pursuant to this Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
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THE DATE OF THIS PROSPECTUS IS , 1997.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") by the Company's predecessor,
Crescent Real Estate Equities, Inc. (the "Predecessor Corporation") (Exchange
Act file number 1-13038) with the Securities and Exchange Commission (the
"Commission") and are incorporated herein by reference:
1. The Registration Statement of the Predecessor Corporation on Form 8-A
filed on April 18, 1994 registering the common stock, par value $0.01
per share, of the Predecessor Corporation under Section 12(b) of the
Exchange Act.
2. The Proxy Statement in connection with the Predecessor Corporation's
1996 Annual Meeting of Stockholders.
3. The Predecessor Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995, as amended on April 29, 1996.
4. The Predecessor Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
5. The Predecessor Corporation's Current Report on Form 8-K dated August 2,
1994 and filed January 9, 1996, as amended on February 2, 1996 and
February 15, 1996.
6. The Predecessor Corporation's Current Report on Form 8-K dated October
3, 1994 and filed January 9, 1996, as amended on February 2, 1996 and
February 15, 1996.
7. The Predecessor Corporation's Current Report on Form 8-K dated December
19, 1995 and filed January 3, 1996, as amended on February 2, 1996 and
February 15, 1996.
8. The Predecessor Corporation's Current Report on Form 8-K dated April 18,
1996 and filed June 5, 1996.
9. The Predecessor Corporation's Current Report on Form 8-K dated June 17,
1996 and filed September 11, 1996.
10. The Predecessor Corporation's Current Report on Form 8-K dated August
15, 1996 and filed September 11, 1996, as amended on September 27, 1996
and November 12, 1996.
11. The Predecessor Corporation's Current Report on Form 8-K dated
September 27, 1996 and filed September 27, 1996.
12. The Predecessor Corporation's Current Report on Form 8-K dated October
4, 1996 and filed October 4, 1996.
All documents filed subsequent to the date of this Prospectus pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act and prior to termination
of the offering of all Common Shares to which this Prospectus relates shall be
deemed to be incorporated by reference in this Prospectus and shall be part
hereof from the date of filing of such document.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained in this
Prospectus (in the case of a statement in a previously filed document
incorporated or deemed to be incorporated by reference herein), in any
accompanying Prospectus Supplement or in any other subsequently filed document
that is also incorporated or deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or any accompanying Prospectus Supplement.
Subject to the foregoing, all information appearing in this Prospectus and each
accompanying
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Prospectus Supplement is qualified in its entirety by the information appearing
in the documents incorporated by reference.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the written or oral request of
any such person, a copy of any or all of the documents incorporated by reference
in this Prospectus (other than exhibits and schedules thereto, unless such
exhibits or schedules are specifically incorporated by reference into the
information that this Prospectus incorporates). Written or telephonic requests
for copies should be directed to Crescent Real Estate Equities Trust, 777 Main
Street, Suite 2100 Fort Worth, Texas 76102, Attention: Company Secretary
(telephone number: (817) 878-0477).
3
<PAGE> 6
THE COMPANY
Crescent Real Estate Equities Trust (the "Company" or "Crescent Equities")
is a fully integrated real estate company operating as a real estate investment
trust for federal income tax purposes (a "REIT"). The Company, a Texas real
estate investment trust, became the successor to Crescent Real Estate Equities,
Inc., a Maryland corporation (the "Predecessor Corporation"), on December 31,
1996, through the merger (the "Merger") of the Predecessor Corporation and CRE
Limited Partner, Inc., a Delaware corporation, into the Company. The Merger was
structured to preserve unchanged the existing business, purpose, tax status,
management, capitalization and assets, liabilities and net worth (other than due
to the costs of the transaction) of the Predecessor Corporation, and the
economic interests and voting rights of the stockholders of the Predecessor
Corporation (who became the shareholders of the Company as a result of the
Merger). The Board of Trust Managers and the executive officers of the Company
are identical to, and have the same terms of office as, the Board of Directors
and executive officers of the Predecessor Corporation. The Company, as successor
issuer to the Predecessor Corporation, expressly adopts, to the extent
applicable, the statements of the Predecessor Corporation in the registration
statement on Form S-3 (the "Registration Statement") to which this Prospectus is
a part as its own Registration Statement for all purposes of the Securities Act
of 1933, as amended (the "Securities Act") and the Exchange Act. The
Registration Statement also sets forth additional information necessary to
reflect any material changes resulting from the Merger. The term "Company"
includes, as the context requires, the Predecessor Corporation, the Operating
Partnership (as defined below) and the other subsidiaries of the Company.
As of December 31, 1996, the Company, through its subsidiaries, directly or
indirectly owned a portfolio of real estate assets (the "Properties") located
primarily in 16 metropolitan submarkets in Texas and Colorado. The Properties
include 53 office properties (the "Office Properties") with an aggregate of
approximately 16.3 million net rentable square feet, four full-service hotels
with a total of 1,471 rooms, two destination health and fitness resorts (the
"Hotel Properties"), six retail properties (the "Retail Properties") with an
aggregate of approximately .6 million net rentable square feet and real estate
mortgages (the "Residential Development Property Mortgages") and non-voting
common stock in three residential development corporations (the "Residential
Development Corporations") that own all or a portion of six single-family
residential land developments and three prospective condominium/townhome
developments (the "Residential Development Properties"). In addition, the
Company, through one of its subsidiaries, owns one mortgage note secured by a
Class A office property (the "Biltmore Note").
The Company, as a fully integrated real estate company, provides
management, leasing and development services with respect to certain of its
Properties. As of December 31, 1996, the Company had approximately 200 employees
and its eight officers had over 100 years of combined experience in the real
estate industry.
The Company's direct and indirect subsidiaries include Crescent Real Estate
Equities Limited Partnership (the "Operating Partnership"); Crescent Real Estate
Equities, Ltd. (the "General Partner" or "CREE, Ltd."), which is the sole
general partner of the Operating Partnership; Crescent Real Estate Funding I,
L.P. ("Funding I"), Crescent Real Estate Funding II, L.P. ("Funding II"),
Crescent Real Estate Funding III, L.P. ("Funding III"), Crescent Real Estate
Funding IV, L.P. ("Funding IV"), and Crescent Real Estate Funding V, L.P.
("Funding V"), limited partnerships in which the Operating Partnership owns
substantially all of the economic interests directly or indirectly with the
remaining interests owned indirectly by the Company through CRE Management I
Corp. ("Management I"), CRE Management II Corp. ("Management II"), CRE
Management III Corp. ("Management III"), CRE Management IV Corp. ("Management
IV") and CRE Management V Corp. ("Management V"), which are wholly-owned
subsidiaries of the General Partner and are the general partners of Funding I,
Funding II, Funding III, Funding IV and Funding V, respectively.
The Company conducts all of its business directly through the Operating
Partnership and its other subsidiaries and indirectly through the Operating
Partnership's interests in the Residential Development Corporations. The General
Partner controls the Operating Partnership and the Company is the sole
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shareholder of the General Partner. In addition, as of December 31, 1996, the
Company owned an approximately 83.5% limited partner interest in the Operating
Partnership.
Pursuant to the limited partnership agreement of the Operating Partnership
(the "Operating Partnership Agreement"), limited partners of the Operating
Partnership (the "Limited Partners") may elect to exchange (the "Exchange
Right") their units of partnership interest in the Operating Partnership
("Units") for common shares of beneficial interest, par value $.01 per share
("Common Shares") on a one-for-one basis (subject to certain exceptions) or, at
the election of the Company, for cash equal to the then-current fair market
value of the number of Common Shares for which such Units are exchangeable. The
Company anticipates that, consistent with the Ownership Limit, it generally will
elect to issue Common Shares rather than pay cash in connection with such
exchanges. See "Exchange of Units -- General" and "Description of Shares of the
Company -- Ownership Limits and Restrictions on Transfer." To the extent that
Limited Partners elect to exchange their Units, the Company's interest in the
Operating Partnership will increase.
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SECURITIES TO BE OFFERED
This Prospectus relates to (i) the possible issuance by the Company of up
to 6,474,288 Common Shares (the "Original Exchange Shares") if, and to the
extent that, holders of up to 6,474,288 Units (the "Original Units") tender such
Original Units in exchange for Common Shares, (ii) the offer and sale from time
to time of up to 2,017,392 outstanding Common Shares (the "Original Shares") by
the holders thereof, (iii) the possible distribution of up to 617,392 Original
Shares if, and to the extent that, the holder thereof (which is a limited
partnership) distributes such Original Shares pro rata to its partners as part
of the liquidation and winding up of the affairs of such holder, (iv) the
possible issuance by the Company of up to 1,097,014 shares (the "RER Exchange
Shares") if, and to the extent that, the holder of up to 1,097,014 Units (the
"RER Units") tenders such RER Units in exchange for Common Shares, (v) the
possible issuance by the Company of up to 9,522 shares (the "JME Exchange
Shares") if, and to the extent that, the holder of up to 9,522 Units (the "JME
Units") tenders such JME Units in exchange for Common Shares, and (vi) the offer
and sale or other distribution from time to time by the holders thereof (the
"Selling Shareholders") of any Original Exchange Shares, RER Exchange Shares and
JME Exchange Shares (collectively, the "Exchange Shares") and any Original
Shares (collectively with the Exchange Shares, the "Secondary Shares"). The
Original Units and the Original Shares were issued (or reserved for issuance) in
connection with the formation of the Company and the Company's initial public
offering. The RER Units were issued, in a private placement in April 1995 to an
affiliate of Richard E. Rainwater, the Chairman of the Board of Trust Managers,
and the issuance of Common Shares upon any exchange thereof was approved by the
shareholders of the Company at its Annual Meeting held on June 12, 1995. The JME
Units were issued to an employee of the General Partner in a private placement
in May 1995. The Company has registered the Original Shares and the Exchange
Shares to provide the Selling Shareholders with freely tradeable securities, but
the registration of such shares does not necessarily mean that any of such
shares will be offered or sold by the Selling Shareholders. See "The Company"
and "Registration Rights." Of the Common Shares to which this Prospectus
relates, had been sold as of , 1997. A portion of the
Original Units and all of the RER Units and JME Units have been exchanged for
Common Shares, and a portion of the Original Shares and Original Units have been
distributed as of 1997. See "Selling Shareholders. "
RISK FACTORS
Prospective investors should carefully consider the following summary
information in conjunction with the other information contained in this
Prospectus before exchanging Units or purchasing Common Shares.
CONCENTRATION OF ASSETS
A significant portion of the Company's assets and revenues are derived from
Properties located in the Dallas-Fort Worth and Houston, Texas and Denver,
Colorado metropolitan areas. Due to this geographic concentration, any
deterioration in economic conditions in the Dallas-Fort Worth, Houston and
Denver metropolitan areas or other geographic markets in which the Company in
the future may acquire substantial assets could have a substantial effect on the
financial condition and results of operations of the Company.
RISKS ASSOCIATED WITH THE ACQUISITION OF SUBSTANTIAL NEW ASSETS
From the closing of the Company's initial public offering in May 1994
through the date of this Prospectus, the Company has experienced rapid growth,
increasing its portfolio of Office Properties on the basis of rentable square
feet, by more than 530 percent. There can be no assurance either that the
Company will be able to manage its growth effectively or that the Company will
be able to maintain its current rate of growth in the future.
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PURCHASES FROM FINANCIALLY DISTRESSED SELLERS
Implementation of the Company's strategy of investing in real estate assets
in distressed circumstances has resulted in the acquisition of certain
Properties from owners that were in poor financial condition, and such strategy
is expected to result in the purchase of additional properties under similar
circumstances in the future. In addition to general real estate risks,
properties acquired in distress situations present risks related to inadequate
maintenance, negative market perception and continuation of circumstances which
precipitated the distress originally.
RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of Mr. Richard E. Rainwater,
Chairman of the Board of Trust Managers and other senior management personnel.
While the Company believes that it could find replacements for these key
executives, the loss of their services could have an adverse effect on the
operations of the Company. Mr. Rainwater has no employment agreement with the
Company and, therefore, is not obligated to remain with the Company for any
specified term. John C. Goff, Trust Manager and Vice Chairman of the Board of
Trust Managers, and Gerald W. Haddock, President, Chief Executive Officer and
Trust Manager, have entered into employment agreements with the Company, and
Messrs. Rainwater, Goff and Haddock each has entered into a noncompetition
agreement with the Company. The Company has not obtained key-man insurance for
any of its senior management personnel.
RISKS RELATING TO QUALIFICATION AND OPERATION AS A REIT
The Company intends to continue to operate in a manner so as to qualify as
a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). A
qualified REIT generally is not taxed at the corporate level on income it
currently distributes to its shareholders, so long as it distributes at least 95
percent of its taxable income currently and satisfies certain other highly
technical and complex requirements. Unlike many REITs, which tend to make only
one or two types of real estate investments, the Company invests in a broad
range of real estate products, and certain of its investments are more
complicated than those of other REITs. As a result, the Company is likely to
encounter a greater number of interpretative issues under the REIT qualification
rules, and more such issues which lack clear guidance, than are other REITs. The
Company, as a matter of policy, regularly consults with outside tax counsel in
structuring its new investments. The Company has received an opinion from Shaw,
Pittman, Potts & Trowbridge ("Tax Counsel") that the Company qualified as a REIT
under the Code for its taxable years ending on or before December 31, 1996, is
organized in conformity with the requirements for qualification as a REIT under
the Code and its proposed manner of operation will enable it to continue to meet
the requirements for qualification as a REIT. However, this opinion is based
upon certain representations made by the Company and the Operating Partnership
and upon existing law, which is subject to change, both retroactively and
prospectively, and to possibly different interpretations. Furthermore, Tax
Counsel's opinion is not binding upon either the Internal Revenue Service or the
courts. Because the Company's qualification as a REIT in its current and future
taxable years depends upon its meeting the requirements of the Code in future
periods, no assurance can be given that the Company will continue to qualify as
a REIT in the future. If, in any taxable year, the Company were to fail to
qualify as a REIT for federal income tax purposes, it would not be allowed a
deduction for distributions to shareholders in computing taxable income and
would be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates. In addition,
unless entitled to relief under certain statutory provisions, the Company would
be disqualified from treatment as a REIT for federal income tax purposes for the
four taxable years following the year during which qualification was lost. The
additional tax liability resulting from the failure to so qualify would
significantly reduce the amount of funds available for distribution to
shareholders.
RISKS RELATING TO DEBT
The Company's organizational documents do not limit the level or amount of
debt that it may incur. It is the Company's current policy to pursue a strategy
of conservative use of leverage, generally with a ratio of debt to total market
capitalization targeted at approximately 40 percent, although this policy is
subject to
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reevaluation and modification by the Company and could be increased above 40
percent. The Company has based its debt policy on the relationship between its
debt and its total market capitalization, rather than the book value of its
assets or other historical measures that typically have been employed by
publicly traded REITs, because management believes that market capitalization
more accurately reflects the Company's ability to borrow money and meet its debt
service requirements. Market capitalization is, however, more variable than book
value of assets or other historical measures. There can be no assurance that the
ratio of indebtedness to market capitalization (or any other measure of asset
value) or the incurrence of debt at any particular level would not adversely
affect the financial condition and results of operations of the Company.
RISKS RELATING TO CONTROL OF THE COMPANY
Ability to Change Policies and Acquire Assets without Shareholder
Approval. The Company's operating and financial policies, including its
policies with respect to acquisitions, growth, operations, indebtedness,
capitalization and distributions, will be determined by the Board of Trust
Managers. The Board of Trust Managers generally may revise these policies, from
time to time, without shareholder approval. Changes in the Company's policies
could adversely affect the Company's financial condition and results of
operations. In addition, the Company has the right and intends to acquire
additional real estate assets pursuant to and consistent with its investment
strategies and policies without shareholder approval.
Hotel Risks. The Company has leased the Hotel Properties and the lessee of
a Hotel Property, rather than the Company, is entitled to exercise all rights of
the owner of the respective hotel. The Company will receive both base rent and,
as additional rent, a percentage of gross sales above a certain minimum level
pursuant to the leases. As a result, the Company will participate in the
economic operations of the Hotel Properties only through its indirect
participation in gross sales. To the extent that operations of the Hotel
Properties may affect the ability of the lessees of the Hotel Properties to pay
rent, the Company also may indirectly bear the risks associated with any
increases in expenses or decreases in revenues. Each of the Hotel Properties is
managed pursuant to a management agreement. The Company, therefore, will be
dependent upon the lessees and managers of the Hotel Properties to manage the
operations of the Hotel Properties successfully. As a result, the amount of
additional rent payable to the Company under the leases with respect to the
Hotel Properties will depend on the ability of the lessees and managers of the
Hotel Properties to maintain and increase revenues from the Hotel Properties.
Accordingly, the Company's results of operations will be affected by such
factors as changes in general economic conditions, the level of demand for rooms
and related services at the Hotel Properties, the ability of the lessees and
managers of the Hotel Properties to maintain and increase gross revenues at the
Hotel Properties, competition in the hotel industry and other factors relating
to the operation of the Hotel Properties.
Lack of Control of Residential Development Corporations. The Company is
not able to elect the boards of directors of the Residential Development
Corporations, and does not have the authority to control the management and
operation of the Residential Development Corporations. As a result, the Company
does not have the right to control the timing or amount of dividends paid by the
Residential Development Corporations and, therefore, does not have the authority
to require that funds be distributed to it by any of these entities.
Possible Adverse Consequences of Ownership Limit. The limitation on
ownership of Common Shares set forth in the Company's Declaration of Trust, as
well as the provisions of Texas law, could have the effect of discouraging
offers to acquire the Company and of inhibiting or impeding a change in control
and, therefore, could adversely affect the shareholders' ability to realize a
premium over the then-prevailing market price for the Common Shares in
connection with such a transaction. See "Description of Shares of the Company --
Ownership Limits and Restrictions on Transfer."
GENERAL REAL ESTATE RISKS
Uncontrollable Factors Affecting Performance and Value. The economic
performance and value of the Company's real estate assets will be subject to all
of the risks incident to the ownership and operation of real estate. These
include the risks normally associated with changes in general national, regional
and local economic and market conditions. Such local real estate market
conditions may include excess supply and
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competition for tenants, including competition based on rental rates,
attractiveness and location of the property and quality of maintenance,
insurance and management services. In addition, other factors may affect the
performance and value of a property adversely, including changes in laws and
governmental regulations (including those governing usage, zoning and taxes),
changes in interest rates (including the risk that increased interest rates may
result in decreased sales of lots in the Residential Development Properties) and
the availability of financing. The success of the Hotel Properties, for example,
will be highly dependent upon their ability to compete in such features as
access, location, quality of accommodations, room rate structure and, to a
lesser extent, the quality and scope of other amenities such as food and
beverage facilities.
Illiquidity of Real Estate Investments. Because real estate investments
are relatively illiquid, the Company's ability to vary its portfolio promptly in
response to economic or other conditions will be limited. In addition, certain
significant expenditures, such as debt service (if any), real estate taxes, and
operating and maintenance costs, generally are not reduced in circumstances
resulting in a reduction in income from the investment. The foregoing and any
other factor or event that would impede the ability of the Company to respond to
adverse changes in the performance of its investments could have an adverse
effect on the Company's financial condition and results of operations.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations, an owner or operator of real property may become
liable for the costs of removal or remediation of certain hazardous or toxic
substances released on or in its property, as well as certain other costs
relating to hazardous or toxic substances. Such liability may be imposed without
regard to whether the owner or operator knew of, or was responsible for, the
release of such substances. The presence of, or the failure to remediate
properly, such substances, when released, may adversely affect the owner's
ability to sell the affected real estate or to borrow using such real estate as
collateral. Such costs or liabilities could exceed the value of the affected
real estate. The Company has not been notified by any governmental authority of
any non-compliance, liability or other claim in connection with any of the
Properties and the Company is not aware of any other environmental condition
with respect to any of the Properties that management believes would have a
material adverse effect on the Company's business, assets or results of
operations. Prior to the Company's acquisition of its Properties, independent
environmental consultants conducted or updated Phase I environmental assessments
(which generally do not involve invasive techniques such as soil or ground water
sampling) on the Properties. None of these Phase I assessments or updates
revealed any materially adverse environmental condition not known to the Company
or the independent consultants preparing the assessments. There can be no
assurance, however, that environmental liabilities have not developed since such
environmental assessments were prepared, or that future uses or conditions
(including, without limitation, changes in applicable environmental laws and
regulations) will not result in imposition of environmental liability.
REAL ESTATE RISKS SPECIFIC TO THE COMPANY'S BUSINESS
Acquisition, Lease and Development Risks. There can be no assurance that
the Company will be able to implement its investment strategies successfully or
that its Property portfolio will expand at all, or at any specified rate or to
any specified size. The Company also is subject to the risks that, upon
expiration, leases for space in the Office Properties and Retail Properties may
not be renewed, the space may not be re-leased, or the terms of renewal or
re-lease (including the cost of required renovations or concessions to tenants)
may be less favorable than current lease terms. In addition, the Company intends
to continue to pursue development activities with respect to the Residential
Development Properties and, in the future, may elect to engage in other
development activities.
Risks of Joint Ownership of Assets. The Company has the right to invest,
and in certain cases has invested, in properties and assets jointly with other
persons or entities. Joint ownership of properties, under certain circumstances,
may involve risks not otherwise present, including the possibility that the
Company's partners or co-investors might become bankrupt, that such partners or
co-investors might at any time have economic or other business interests or
goals which are inconsistent with the business interests or goals of the
Company, and that such partners or co-investors may be in a position to take
action contrary to the instructions or the requests of the Company or contrary
to the Company's policies or objectives, including the Company's policy with
respect to maintaining its qualification as a REIT.
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SPECIAL CONSIDERATIONS APPLICABLE TO EXCHANGING LIMITED PARTNERS
Tax Consequences of Exchange of Units. The exercise by a holder of Units
of his Exchange Right will be treated for tax purposes as a sale of the Units by
the Limited Partner. Such a sale will be fully taxable to the exchanging Limited
Partner, and such exchanging Limited Partner will be treated as realizing for
tax purposes an amount equal to the sum of the cash or the value of the Common
Shares received in the exchange plus the amount of the Operating Partnership
nonrecourse liabilities allocable to the exchanged Units at the time of the
exchange. It is possible that the amount of gain recognized or even the tax
liability resulting from such gain could exceed the amount of cash and the value
of other property (e.g., Exchange Shares) received upon such disposition. See
"Exchange of Units -- Tax Consequences of Exchange." In addition, the ability of
the Limited Partner to sell a substantial number of Exchange Shares in order to
raise cash to pay tax liabilities associated with exchange of Units may be
restricted, and, as a result of fluctuations in the stock price, the price the
Limited Partner receives for such shares may not equal the value of his Units at
the time of exchange.
Potential Change in Investment Upon Exchange of Units. If a Limited
Partner exercises an Exchange Right, such Limited Partner may receive cash or
Common Shares of the Company in exchange for the Units. If the Limited Partner
receives cash, the Limited Partner will no longer have any interest in the
Company and will not benefit from any subsequent increases in share price and
will not receive any future distributions from the Company (unless the Limited
Partner currently owns or acquires in the future additional Common Shares or
Units). If the Limited Partner receives Common Shares, the Limited Partner will
become a shareholder of the Company rather than a holder of Units in the
Operating Partnership. Although the nature of an investment in Common Shares is
substantially equivalent to an investment in Units in the Operating Partnership,
there are some differences between ownership of Units and ownership of Common
Shares relating to, among other things, form of organization, permitted
investments, policies and restrictions, management structure, compensation and
fees, investor rights and federal income taxation. These differences, some of
which may be material to investors, are discussed in "Exchange of
Units -- Comparison of Ownership of Units and Common Shares."
Under the Operating Partnership Agreement, the Company, acting through the
General Partner, has full and complete authority, responsibility and discretion
in the management and control of the Operating Partnership, subject to limited
consent rights of the other Limited Partners with respect to amendments to the
Operating Partnership Agreement (which, in general, require the approval of a
majority in interest of the Limited Partners) and amendments which adversely
affect the rights of Limited Partners (certain of which require the approval of
each Limited Partner so affected). See "Description of Units -- Management." The
Company's interests in the Operating Partnership (directly and through the
General Partner) entitle it to share in cash distributions from, and in the
profits and losses of, the Operating Partnership in accordance with its
percentage of partnership interests therein.
DESCRIPTION OF SHARES OF THE COMPANY
Common Shares. The Declaration of Trust authorizes the Board of Trust
Managers of the Company to issue up to 250,000,000 Common Shares, as well as
250,000,000 Excess Shares, par value $0.01 per share, issuable in exchange for
Common Shares as described below under "-- Ownership Limits and Restrictions on
Transfer."
Subject to such preferential rights as may be granted by the Board of Trust
Managers in connection with the future issuance of Preferred Shares, holders of
Common Shares are entitled to one vote per share on all matters to be voted on
by shareholders and are entitled to receive ratably such dividends as may be
declared on the Common Shares by the Board of Trust Managers in its discretion
from funds legally available therefor. In the event of the liquidation,
dissolution or winding up of the Company, holders of Common Shares are entitled
to share ratably in all assets remaining after payment of all debts and other
liabilities and any liquidation preference of the holders of Preferred Shares.
Holders of Common Shares have no subscription, redemption, conversion or
preemptive rights. Matters submitted for shareholder approval generally require
a majority vote of the shares present and voting thereon.
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Preferred Shares. The Declaration of Trust of the Company authorizes the
Board of Trust Managers of the Company to issue up to 100,000,000 preferred
shares of beneficial interest, par value $.01 per share (the "Preferred
Shares"), to establish one or more series of such Preferred Shares and to
determine, with respect to any series of Preferred Shares, the preferences,
rights and other terms of such series. As of the date of this Prospectus, there
are no Preferred Shares outstanding. Although the Board of Trust Managers has no
present intention to do so, it could, in the future, issue a series of Preferred
Shares which, due to its terms, could impede a merger, tender offer or other
transaction that some, or a majority, of the Company's shareholders might
believe to be in their best interests or in which shareholders might receive a
premium over then prevailing market prices for their Common Shares. The
Declaration of Trust also authorizes the issuance of up to an aggregate of
100,000,000 Excess Shares issuable in exchange for Preferred Shares as described
below under "-- Ownership Limits and Restrictions on Transfer."
Ownership Limits and Restrictions on Transfer. For the Company to qualify
as a REIT under the Code, (i) not more than 50% in value of outstanding equity
securities of all classes ("Equity Securities") may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year; (ii) the Equity
Securities must be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a proportionate part of a shorter
taxable year; and (iii) certain percentages of the Company's gross income must
come from certain activities.
To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding Equity Securities, the Company's Declaration of Trust
provides generally that no holder may own, or be deemed to own by virtue of
certain attribution provisions of the Code, more than 8.0% of the issued and
outstanding Common Shares or more than 9.9% of the issued and outstanding shares
of any series of Preferred Shares, except that Mr. Rainwater, the Chairman of
the Board of Trust Managers, and certain related persons together may own, or be
deemed to own, by virtue of certain attribution provisions of the Code, up to
9.5% (the "Rainwater Ownership Limit") of the issued and outstanding Common
Shares and up to 9.9% of the issued and outstanding shares of any series of
Preferred Shares (collectively, the "Ownership Limit"). The Board of Trust
Managers, upon receipt of a ruling from the IRS, an opinion of counsel, or other
evidence satisfactory to the Board of Trust Managers, in its sole discretion,
may waive or change, in whole or in part, the application of the Ownership Limit
with respect to any person that is not an individual (as defined in Section
542(a)(2) of the Code). In connection with any such waiver or change, the Board
of Trust Managers may require such representations and undertakings from such
person or affiliates and impose such other conditions as the Board deems
necessary, advisable or prudent, in its sole discretion, to determine the
effect, if any, of a proposed transaction or ownership of Equity Securities on
the Company's status as a REIT for federal income tax purposes. The Board of
Trust Managers also may reduce the Rainwater Ownership Limit, with the written
consent of Mr. Rainwater, after any transfer permitted by the Declaration of
Trust.
In addition, the Board of Trust Managers may, from time to time, increase
the Common Shares Ownership Limit, except that (i) the Common Shares Ownership
Limit may not be increased and no additional limitations may be created if,
after giving effect thereto, the Company would be "closely held" within the
meaning of Section 856(h) of the Code, (ii) neither the Common Shares Ownership
Limit nor the Preferred Shares Ownership Limit may be increased to a percentage
that is greater than 9.9%, and (iii) the Rainwater Ownership Limit may not be
increased. Prior to any modification of the Ownership Limit or the Rainwater
Ownership Limit with respect to any person, the Board of Trust Managers will
have the right to require such opinions of counsel, affidavits, undertakings or
agreements as it may deem necessary, advisable or prudent, in its sole
discretion, in order to determine or ensure the Company's status as a REIT.
Under the Declaration of Trust, the Ownership Limit will not be
automatically removed even if the REIT provisions of the Code are changed so as
to no longer contain any ownership concentration limitation or if the ownership
concentration limit is increased. In addition to preserving the Company's status
as a REIT for federal income tax purposes, the Ownership Limit may prevent any
person or small group of persons from acquiring control of the Company.
The Declaration of Trust of the Company also provides that if any issuance,
transfer or acquisition of Equity Securities (i) would result in a holder
exceeding the Ownership Limit, (ii) would cause the Company
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to be beneficially owned by fewer than 100 persons, (iii) would result in the
Company's being "closely held" within the meaning of Section 856(h) of the Code,
or (iv) would otherwise result in the failure of the Company to qualify as a
REIT for federal income tax purposes, then such issuance, transfer or
acquisition shall be null and void to the intended transferee or holder, and the
intended transferee or holder will acquire no rights to the shares. Pursuant to
the Declaration of Trust, Equity Securities owned, transferred or proposed to be
transferred in excess of the Ownership Limit or which would otherwise jeopardize
the Company's status as a REIT under the Code automatically will be converted to
Excess Shares. A holder of Excess Shares will not be entitled to distributions,
voting rights and other benefits with respect to such shares except the right to
payment of the purchase price for the shares and the right to certain
distributions upon liquidation. Any dividend or distribution paid to a proposed
transferee on Excess Shares pursuant to the Company's Declaration of Trust will
be required to be repaid to the Company upon demand. Excess Shares will be
subject to repurchase by the Company at its election. The purchase price of any
Excess Shares will be equal to the lesser of (i) the price in such proposed
transaction or (ii) either (a) if the shares are then listed on the New York
Stock Exchange ("NYSE"), the fair market value of such shares reflected in the
average closing sales prices for the shares on the 10 trading days immediately
preceding the date on which the Company or its designee determines to exercise
its repurchase right; or (b) if the shares are not then so listed, such price
for the shares on the principal exchange (including the National Market System
of the NASDAQ Automated Quotation System on which the shares are listed); or (c)
if the shares are not then listed on a national securities exchange, the latest
quoted price for the shares; or (d) if not quoted, the average of the high bid
and low asked prices if the shares are then traded over-the-counter, as reported
by the NASDAQ Automated Quotation System; or (e) if such system is no longer in
use, the principal automated quotation system then in use; or (f) if the shares
are not quoted on such system, the average of the closing bid and asked prices
as furnished by a professional market maker making a market in the shares; or
(g) if there is no such market maker or such closing prices otherwise are
unavailable, the fair market value, as determined by the Board of Trust Managers
in good faith, on the last trading day immediately preceding the day on which
notice of such proposed purchase is sent by the Company. The Declaration of
Trust also establishes certain restrictions relating to transfers of any
Exchange Shares that may be issued. If such transfer restrictions are determined
to be void or invalid by virtue of any legal decision, statute, rule or
regulation, then the Company will have the option to deem the intended
transferee of any Excess Shares to have acted as an agent on behalf of the
Company in acquiring such Excess Shares and to hold such Excess Shares on behalf
of the Company.
Under the Declaration of Trust, the Company has the authority, at any time,
to waive the requirement that Excess Shares be issued or be deemed outstanding
in accordance with the provisions of the Declaration of Trust if the issuance of
such Excess Shares or the fact that such Excess Shares is deemed to be
outstanding would, in the opinion of nationally recognized tax counsel,
jeopardize the status of the Company as a REIT for federal income tax purposes.
All certificates issued by the Company representing Equity Securities will
bear a legend referring to the restrictions described above.
The Declaration of Trust of the Company also provides that all persons who
own, directly or by virtue of the attribution provisions of the Code, more than
5.0% of the outstanding Equity Securities (or such lower percentage as may be
set by the Board of Trust Managers), must file an affidavit with the Company
containing information specified in the Declaration of Trust no later than
January 31 of each year. In addition, each shareholder will be required, upon
demand, to disclose to the Company in writing such information with respect to
the direct, indirect and constructive ownership of shares as the Trust may
request in order to comply with the provisions of the Code, as applicable to a
REIT, or to comply with the requirements of a governmental authority or agency.
The ownership limitations described above may have the effect of inhibiting
or impeding acquisitions of control of the Company by a third party. See
"Certain Provisions of the Declaration of Trust, Bylaws and Texas Law."
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CERTAIN PROVISIONS OF THE DECLARATION OF TRUST
AND BYLAWS AND TEXAS LAW
The Declaration of Trust and the Bylaws of the Company contain certain
provisions that may inhibit or impede acquisition or attempted acquisition of
control of the Company by means of a tender offer, a proxy contest or otherwise.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with the Board of Trust
Managers. The Company believes that these provisions increase the likelihood
that proposals initially will be on more attractive terms than would be the case
in their absence and increase the likelihood of negotiations, which might
outweigh the potential disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals might result in improvement of
terms. The description set forth below is only a summary of the terms of the
Declaration of Trust and the Bylaws (copies of which have been filed with the
Registration Statement of which this Prospectus forms a part). See "Description
of Shares of the Company -- Ownership Limits and Restrictions on Transfer."
Staggered Board of Trust Managers. The Declaration of Trust and the Bylaws
of the Company provide that the Board of Trust Managers will be divided into
three classes of trust managers, each class constituting approximately one-third
of the total number of trust managers, with the classes serving staggered
three-year terms. The classification of the Board of Trust Managers will have
the effect of making it more difficult for shareholders to change the
composition of the Board of Trust Managers, because only a minority of the trust
managers are up for election, and may be replaced by vote of the shareholders,
at any one time. The Company believes, however, that the longer terms associated
with the classified Board of Trust Managers will help to ensure continuity and
stability of the Company's management and policies.
The classification provisions also could have the effect of discouraging a
third party from accumulating a large block of the Company's capital shares or
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and some, or a majority, of its shareholders.
Accordingly, under certain circumstances shareholders could be deprived of
opportunities to sell their Common Shares at a higher price than might otherwise
be available.
Number of Trust Managers; Removal; Filling Vacancies. Subject to any
rights of holders of Preferred Shares to elect additional trust managers under
specified circumstances ("Preferred Holders' Rights"), the Declaration of Trust
provides that the number of trust managers will be fixed by, or in the manner
provided in, the Bylaws, but must not be more than 25 nor less than one. In
addition, the Bylaws provide that, subject to any Preferred Holders' Rights, the
number of trust managers will be fixed by the Board of Trust Managers, but must
not be more than 25 nor less than three. In addition, the Bylaws provide that,
subject to any Preferred Holders' Rights, and unless the Board of Trust Managers
otherwise determines, any vacancies (other than vacancies created by an increase
in the total number of trust managers) will be filled by the affirmative vote of
a majority of the remaining trust managers, although less than a quorum, and any
vacancies created by an increase in the total number of trust managers may be
filled by a majority of the entire Board of Trust Managers. Accordingly, the
Board of Trust Managers could temporarily prevent any shareholder from enlarging
the Board of Trust Managers and then filling the new trust manager position with
such shareholder's own nominees.
The Declaration of Trust and the Bylaws provide that, subject to any
Preferred Holders' Rights, trust managers may be removed only for cause upon the
affirmative vote of holders of at least 80% of the entire voting power of all
the then-outstanding shares entitled to vote generally in the election of trust
managers, voting together as a single class.
Relevant Factors to be Considered by the Board of Trust Managers. The
Declaration of Trust provides that, in determining what is in the best interest
of the Company in evaluating a "business combination," "change in control" or
other transaction, a trust manager of the Company shall consider all of the
relevant factors, which may include (i) the immediate and long-term effects of
the transaction on the Company's shareholders, including shareholders, if any,
who do not participate in the transaction; (ii) the social and economic effects
of the transaction on the Company's employees, suppliers, creditors and
customers and others dealing with the Company and on the communities in which
the Company operates and is located;
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(iii) whether the transaction is acceptable, based on the historical and current
operating results and financial condition of the Company; (iv) whether a more
favorable price could be obtained for the Company's shares or other securities
in the future; (v) the reputation and business practices of the other party or
parties to the proposed transaction, including its or their management and
affiliates, as they would affect employees of the Company; (vi) the future value
of the Company's securities; (vii) any legal or regulatory issues raised by the
transaction; and (viii) the business and financial condition and earnings
prospects of the other party or parties to the proposed transaction including,
without limitation, debt service and other existing financial obligations,
financial obligations to be incurred in connection with the transaction, and
other foreseeable financial obligations of such other party or parties. Pursuant
to this provision, the Board of Trust Managers may consider subjective factors
affecting a proposal, including certain nonfinancial matters, and, on the basis
of these considerations, may oppose a business combination or other transaction
which, evaluated only in terms of its financial merits, might be attractive to
some, or a majority, of the Company's shareholders.
Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals. The Bylaws provide for an advance notice procedure for shareholders
to make nominations of candidates for trust manager or bring other business
before an annual meeting of shareholders of the Company (the "Shareholder Notice
Procedure").
Pursuant to the Shareholder Notice Procedure (i) only persons who are
nominated by, or at the direction of, the Board of Trust Managers, or by a
shareholder who has given timely written notice containing specified information
to the Secretary of the Company prior to the meeting at which trust managers are
to be elected, will be eligible for election as trust managers of the Company
and (ii) at an annual meeting, only such business may be conducted as has been
brought before the meeting by, or at the direction of the Chairman or the Board
of Trust Managers or by a shareholder who has given timely written notice to the
Secretary of the Company of such shareholder's intention to bring such business
before such meeting. In general, for notice of shareholder nominations or
proposed business to be conducted at an annual meeting to be timely, it will be
a requirement that such notice be received by the Company not less than 70 days
nor more than 90 days prior to the first anniversary of the previous year's
annual meeting.
The purpose of requiring shareholders to give the Company advance notice of
nominations and other business is to afford the Board of Trust Managers a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Trust Managers, to inform shareholders
and make recommendations about such nominees or business, as well as to ensure
an orderly procedure for conducting meetings of shareholders. Although the
Bylaws do not give the Board of Trust Managers power to block shareholder
nominations for the election of trust managers or any shareholder proposal for
action, they may have the effect of discouraging a shareholder from proposing
nominees or business, precluding a contest for the election of trust managers or
the consideration of shareholder proposals if procedural requirements are not
met, and deterring third parties from soliciting proxies for a non-management
proposal or slate of trust managers, without regard to the merits of such
proposal or slate.
Preferred Shares. The Declaration of Trust authorizes the Board of Trust
Managers to establish one or more series of Preferred Shares and to determine,
with respect to any series of Preferred Shares, the preferences, rights and
other terms of such series. See "Description of Shares of the
Company -- Preferred Shares." The Company believes that the ability of the Board
of Trust Managers to issue one or more series of Preferred Shares provides the
Company with increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs. The authorized Preferred
Shares are available for issuance without further action by the Company's
shareholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board of Trust Managers has no
present intention to do so, it could, in the future, issue a series of Preferred
Shares which, due to its terms, could impede a merger, tender offer or other
transaction that some, or a majority, of the Company's shareholders might
believe to be in their best interests or in which shareholders might receive a
premium over then prevailing market prices for their Common Shares.
Amendment of Declaration of Trust. The Declaration of Trust provides that
it may be amended only by the affirmative vote of the holders of not less than
two-thirds of the votes entitled to be cast, except that the
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provisions of the Declaration of Trust relating to "business combinations" or
"control shares" (as described below under "-- Business Combinations" and
"-- Control Share Acquisitions") may be amended only with the affirmative vote
of 80% of the votes entitled to be cast, voting together as a single class.
Rights to Purchase Securities and Other Property. The Declaration of Trust
authorizes the Board of Trust Managers, subject to any rights of holders of any
series of Preferred Shares, to create and issue rights entitling the holders
thereof to purchase from the Company shares of beneficial interest or other
securities or property. The times at which and terms upon which such rights are
to be issued are within the discretion of the Board of Trust Managers. This
provision is intended to confirm the authority of the Board of Trust Managers to
issue share purchase rights which could have terms that would impede a merger,
tender offer or other takeover attempt, or other rights to purchase securities
of the Company or any other entity.
Business Combinations. The Declaration of Trust establishes special
requirements with respect to "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and
any person who beneficially owns, directly or indirectly, 10% or more of the
voting power of the Company's shares (an "Interested Shareholder"), subject to
certain exemptions. In general, the Declaration of Trust provides that an
Interested Shareholder or any affiliate thereof may not engage in a "business
combination" with the Company for a period of five years following the date he
becomes an Interested Shareholder. Thereafter, pursuant to the Declaration of
Trust, such transactions must be (i) approved by the Board of Trust Managers of
the Company and (ii) approved by the affirmative vote of at least 80% of the
votes entitled to be cast by holders of voting shares other than voting shares
held by the Interested Shareholder with whom the business combination is to be
effected, unless, among other things, the holders of Common Shares receive a
minimum price (as such term is defined in the Declaration of Trust) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Shareholder for his shares. These provisions
of the Declaration of Trust do not apply, however, to business combinations that
are approved or exempted by the Board of Trust Managers of the Company prior to
the time that the Interested Shareholder becomes an Interested Shareholder.
Control Share Acquisitions. The Declaration of Trust provides that
"control shares" of the Company acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast by shareholders, excluding shares owned by the acquiror,
officers of the Company and employees of the Company who are also trust managers
of the Company. Accordingly, "control shares" will be defined as shares which,
if aggregated with all other shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of the outstanding shares. Control shares do not include shares that
the acquiring person is entitled to vote on the basis of prior shareholder
approval. A "control share acquisition" is defined as the acquisition of control
shares, subject to certain exemptions enumerated in the Declaration of Trust.
The Declaration of Trust provides that a person who has made or proposes to
make a control share acquisition and who has obtained a definitive financing
agreement with a responsible financial institution providing for any amount of
financing not to be provided by the acquiring person may compel the Board of
Trust Managers of the Company to call a special meeting of shareholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the Declaration of Trust permits the Company
itself to present the question at any shareholders' meeting.
Pursuant to the Declaration of Trust, if voting rights are not approved at
a shareholders' meeting or if the acquiring person does not deliver an acquiring
person statement as required by the Declaration of Trust, then, subject to
certain conditions and limitations set forth in the Declaration of Trust, the
Company will have the right to redeem any or all of the control shares, except
those for which voting rights have previously been approved, for fair value
determined, without regard to the absence of voting rights of the control
shares, as of the date of the last control share acquisition or of any meeting
of shareholders at which the voting rights of such shares are considered and not
approved. Under the Declaration of Trust, if voting rights for control shares
are approved at a shareholders' meeting and, as a result, the acquiror would be
entitled to vote a majority of
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the shares entitled to vote, all other shareholders will have the rights of
dissenting shareholders under the Texas Real Estate Investment Trust (the
"TRA"). The Declaration of Trust provides that the fair value of the shares for
purposes of such appraisal rights may not be less than the highest price per
share paid by the acquiror in the control share acquisition, and that certain
limitations and restrictions of the TRA otherwise applicable to the exercise of
dissenters' rights will not apply.
These provisions of the Declaration of Trust do not apply to shares
acquired in a merger, consolidation or share exchange if the Company is a party
to the transaction, or if the acquisition is approved or excepted by the
Declaration of Trust or Bylaws of the Company prior to a control share
acquisition.
Ownership Limit. The limitation on ownership of Common Shares set forth in
the Company's Declaration of Trust, as well as the provisions of the TRA, could
have the effect of discouraging offers to acquire the Company and of increasing
the difficulty of consummating any such offer. See "Description of Shares of the
Company -- Ownership Limits and Restrictions on Transfer."
DESCRIPTION OF UNITS
The following is a summary of the material terms of the Units, including a
summary of certain provisions of the Operating Partnership Agreement. Such
summary, including the descriptions of certain provisions set forth elsewhere in
this Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. For a comparison of the voting and
other rights of the holders of Units and the Company's shareholders, see
"Exchange of Units -- Comparison of Ownership of Units and Common Shares."
MANAGEMENT
Pursuant to the Operating Partnership Agreement, the Company, through the
General Partner, which is the sole general partner of the Operating Partnership,
generally has full and complete authority, responsibility and discretion in the
management and control of the Operating Partnership, and the Limited Partners
have no authority to transact business for, or participate in the management
activities or decisions of, the Operating Partnership. The Company, through the
General Partner, has the power to amend the Operating Partnership Agreement to
(i) add to the obligations of the General Partner or surrender any right or
power granted to the General Partner or its affiliates for the benefit of the
Limited Partners, (ii) reflect the admission, substitution, termination or
withdrawal of partners in accordance with the terms of Operating Partnership
Agreement, (iii) reflect an inconsequential change that has no material adverse
effect on the Limited Partners, (iv) cure an ambiguity, or correct or supplement
the Operating Partnership Agreement in a manner not inconsistent with law or the
other provisions of the Operating Partnership Agreement, or (v) make other
changes with respect to matters arising under the Operating Partnership
Agreement not inconsistent with law or the provisions of the Operating
Partnership Agreement. However, any other amendments to the Operating
Partnership Agreement require the consent of a majority in interest of the
Limited Partners. In addition, the Operating Partnership Agreement cannot be
amended without the prior written consent of each partner adversely affected if
such amendment would (i) convert a Limited Partner's interest in the Operating
Partnership into a general partner's interest; (ii) modify the limited liability
of a Limited Partner; (iii) except as expressly permitted by the Operating
Partnership Agreement, alter rights of the partner to receive distributions
pursuant to the Operating Partnership Agreement, or the allocations specified in
the Operating Partnership Agreement; (iv) alter or modify the Exchange Rights;
(v) cause the termination of the Operating Partnership prior to the expiration
of its term; or (vi) amend the section of the Operating Partnership Agreement
setting forth these consent rights.
BUSINESS OPERATIONS
The Operating Partnership Agreement provides that all business activities
of the Company, including all activities pertaining to the acquisition,
development and ownership of the Properties, must be conducted through the
Operating Partnership or through partnerships and limited liability companies
affiliated with the Operating Partnership. The Operating Partnership Agreement
prohibits the Company from borrowing for the
16
<PAGE> 19
purpose of making distributions to shareholders unless it arranges such
borrowing through the Operating Partnership.
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT for federal income tax purposes and to avoid any
federal income or excise tax liability.
CAPITAL CONTRIBUTIONS
The Operating Partnership Agreement provides that, if the Operating
Partnership requires additional funds at any time or from time to time, the
Operating Partnership may borrow such funds directly from a financial
institution or other lender, or Crescent Equities (including the General
Partner) may borrow such funds from a financial institution or other lender and
Crescent Equities may lend such funds to the Operating Partnership on the same
terms and conditions as are applicable to Crescent Equities' borrowing of such
funds. Alternatively, Crescent Equities may contribute the amount of such
required funds as an additional capital contribution to the Operating
Partnership. If Crescent Equities contributes additional capital to the
Operating Partnership in the form of cash or property, the limited partnership
interest of Crescent Equities in the Operating Partnership will be adjusted on a
proportionate basis based upon the value of such additional capital
contributions and the value of the Operating Partnership immediately after such
contributions, while the partnership interests of the other Limited Partners
will be decreased on a proportionate basis. Except in connection with the
Exchange Rights or an incentive compensation plan, Crescent Equities may not
issue additional Common Shares except on a pro rata basis to all shareholders
unless the proceeds from the issuance are contributed to the Operating
Partnership as an additional capital contribution.
If Crescent Equities issues preferred stock, rights, options (other than
options issued pursuant to the existing stock incentive plans of Crescent
Equities), warrants or convertible or exchangeable securities containing the
right to subscribe for or purchase Common Shares ("New Securities") to other
than all holders of Common Shares, it is required to contribute the proceeds
from the issuance of the New Securities to the Operating Partnership in exchange
for a preferential partnership interest having economic rights substantially
similar to those of the New Securities. If the New Securities subsequently are
converted into Common Shares, the preferential partnership interest of Crescent
Equities will be converted into an additional limited partnership interest in
the Operating Partnership, and the partnership interests of the other Limited
Partners will be decreased proportionately, based on the value of the Common
Shares into which the New Securities are converted and the value of the
Operating Partnership at the time of conversion of the New Securities.
AWARDS UNDER STOCK INCENTIVE PLANS
If grants of restricted Common Shares ("Restricted Shares") are made
pursuant to the existing stock incentive plans of the Company (or any stock
incentive plan adopted in the future by the Company), the Operating Partnership
Agreement requires the Company to contribute to the Operating Partnership as an
additional capital contribution the price received (if any) in connection with
such grant. Upon any issuance of Restricted Shares, the Company will be deemed
to have contributed to the Operating Partnership an amount equal to the fair
market value of the Restricted Shares issued. This will have the effect of
increasing the limited partnership interest of the Company (and thus diluting
the percentage interests of the other Limited Partners) in connection with any
grants of Restricted Shares.
If options granted in connection with the existing stock incentive plans of
the Company (or any other stock incentive plan adopted in the future by the
Company) are exercised at any time or from time to time, the Operating
Partnership Agreement requires the Company to contribute to the Operating
Partnership as an additional capital contribution the exercise price received by
the Company in connection with such exercise. Although the Company will
contribute to the Operating Partnership an amount equal to the exercise price
received, the Company will be deemed to have contributed an amount equal to the
fair market value of the Common Shares issued. This will have the effect of
increasing the limited partnership interest of the Company
17
<PAGE> 20
(and thus diluting the percentage interests of the other Limited Partners) in
connection with such additional capital contributions.
OTHER EQUITY COMPENSATION PLANS
The Operating Partnership has adopted two compensation plans that grant
limited partnership interests in the Operating Partnership (including Units), or
options to acquire limited partnership interests, to employees of the Operating
Partnership and may adopt other such plans in the future. The partnership
interests of the other Limited Partners (including the Company) are diluted upon
any admission of an employee of the Operating Partnership as an additional
Limited Partner.
The Operating Partnership or certain of its affiliates may adopt other
incentive compensation plans in which their employees, agents or consultants are
compensated based on the Operating Partnership's revenue or income amounts, or
based on increases in the market value of Operating Partnership assets,
partnership interests in the Operating Partnership or Common Shares.
TRANSFERABILITY OF PARTNERSHIP INTERESTS
The Operating Partnership Agreement generally provides that the General
Partner may not voluntarily withdraw from the Operating Partnership or transfer
its interest therein. In addition, Limited Partners of the Operating Partnership
have the right to be treated in a merger or other combination of the Company on
a substantially equivalent basis with the Company's shareholders or to retain
rights substantially equivalent to the Exchange Rights. (The Limited Partners
retained Exchange Rights in the Merger effected on December 31, 1996.) Limited
Partners may not voluntarily withdraw from the Operating Partnership, but
generally may transfer their interests in the Operating Partnership, except that
a transferee of a limited partnership interest generally may not become a
substitute Limited Partner except with the consent of the General Partner.
REDEMPTION OF SHARES
If the Company redeems Common Shares, it will cause the Operating
Partnership to redeem a proportionate portion of its limited partnership
interest in the Operating Partnership.
ALLOCATIONS AND DISTRIBUTIONS
The net income or net loss of the Operating Partnership for tax purposes
will generally be allocated among the partners in accordance with their
respective percentage interests, subject to compliance with the provisions of
Sections 704(b) and 704(c) of the Code and the regulations promulgated
thereunder.
Pursuant to the Operating Partnership Agreement, the net operating cash
revenues of the Operating Partnership, as well as net sales and refinancing
proceeds, will be distributed from time to time as determined by the Company
(but not less frequently than quarterly) pro rata in accordance with the
partners' ownership interests.
Pursuant to the Operating Partnership Agreement, the Operating Partnership
will also assume and pay when due, or reimburse the Company for payment of,
certain costs and expenses relating to the continuity of existence and
operations of the Company and the General Partner.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
The Company (through the General Partner) has the authority to cause the
Operating Partnership to issue additional interests in the Operating Partnership
and admit additional Limited Partners in the Operating Partnership in exchange
for the contribution of cash or property if it determines that such action is in
the best interest of the Operating Partnership, without the consent of the other
partners. In such event, an additional Limited Partner's interest in the
Operating Partnership will be based on the value of the assets contributed and
the value of the Operating Partnership at the time of such contribution, while
the partnership interest of each existing Limited Partner will be decreased
proportionately. Such additional partner will have all of the rights
18
<PAGE> 21
of a Limited Partner except that such partner will not receive Units
exchangeable for Common Shares unless agreed to by the General Partner.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the General Partner will
be the tax matters partner of the Operating Partnership and, as such, will have
authority to make tax elections under the Code on behalf of the Operating
Partnership.
DUTIES AND CONFLICTS
The Operating Partnership Agreement provides that all business activities
of the Company must be conducted through the Operating Partnership or through
partnerships and limited liability companies affiliated with the Operating
Partnership. The General Partner may hold no assets other than its interest in
the Operating Partnership, interests in subsidiary corporations that own up to
1% of partnerships or limited liability companies in which the Operating
Partnership also owns an interest and such bank accounts and similar instruments
as are necessary for it to conduct its business in accordance with its
Certificate of Incorporation and the Operating Partnership Agreement.
The Operating Partnership is authorized to enter into transactions with
partners and their affiliates, as long as the terms of such transactions are
fair and reasonable, and no less favorable to the Operating Partnership than
could be obtained from an unaffiliated third party.
Any Limited Partner may engage in other business activities outside the
Operating Partnership, including business activities that directly compete with
the Operating Partnership, except that Messrs. Rainwater, Goff and Haddock have
each agreed that, as long as his noncompetition agreement remains in effect
(generally until at least one year after such individual ceases to be a trust
manager or executive officer), he will offer to the Company real estate
investment opportunities presented to him and, if the Company rejects the
opportunity, neither he nor his controlled affiliates will participate in the
investment without the approval of a majority of the independent trust managers.
INDEMNIFICATION
The Operating Partnership Agreement contains indemnification provisions
comparable to those contained in the Declaration of Trust.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2093, or until sooner dissolved (subject to certain exceptions)
upon (i) the bankruptcy, dissolution or termination of the General Partner
(unless a majority in interest of the Limited Partners elect to continue the
Operating Partnership); (ii) the election of the General Partner; or (iii) the
sale or other disposition of all or substantially all the assets of the
Operating Partnership.
RESOLUTION OF DISPUTES
Disputes arising under the Operating Partnership Agreement will be resolved
by arbitration.
REGISTRATION RIGHTS
The Company has filed the Registration Statement of which this Prospectus
is a part pursuant to its obligations under a Registration Rights, Lock-Up and
Pledge Agreement dated as of May 5, 1994, by and among the Company and certain
holders of Original Shares and Original Units (the "Registration Rights
Agreement"). The following summary does not purport to be complete and is
qualified in its entirety by reference to the Registration Rights Agreement. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
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<PAGE> 22
Under the Registration Rights Agreement, the Company is obligated to
maintain the effectiveness of the Registration Statement until a date to be
agreed upon or until such time as all of the Common Shares covered by the
Registration Rights Agreement (i) have been disposed of pursuant to the
Registration Statement of which this Prospectus is a part; (ii) have been sold
pursuant to Rule 144; or (iii) have become eligible for sale pursuant to Rule
144(k) under the Securities Act. The Registration Rights Agreement grants these
rights to holders of Common Shares and Units specified therein (the "Rights
Holders"). The Company has no obligation under the Registration Rights Agreement
to retain any underwriter to effect the sale of the shares covered thereby.
Pursuant to the Registration Rights Agreement, the Company agreed to pay
all expenses of effecting the registration of the Exchange Shares and Original
Shares issued to the Rights Holders (other than underwriting discounts and
commissions, fees and disbursements of counsel to a Rights Holder, and transfer
taxes, if any) pursuant to the Registration Statement. The Company also agreed
to indemnify each Rights Holder and each person, if any, who controls a Rights
Holder against certain losses, claims, damages and expenses arising under the
securities laws. In addition, each Rights Holder agreed to indemnify the Company
and the other Rights Holders, and each person, if any, who controls the Company
or the other Rights Holders against other losses, claims, damages and expenses
arising under the securities laws with respect to written information furnished
to the Company by such Rights Holder for use in this Prospectus or as a result
of such Rights Holder's failure to deliver an amendment or supplement to this
Prospectus.
SELLING SHAREHOLDERS
The following table provides the names of each Selling Shareholder, the
number of Common Shares owned by each Selling Shareholder and the number of
Exchange Shares into which Units held by the person are exchangeable (if the
Company elects to issue shares rather than pay cash upon such exchange). Since
the Selling Shareholders may sell all, a portion or none of their Secondary
Shares, no estimate can be made of the aggregate number of Secondary Shares that
are to be offered hereby or that will be owned by each Selling Shareholder upon
completion of the offering to which this Prospectus relates. In addition to the
Common Shares they currently own, certain Selling Shareholders may also offer
the Exchange Shares they will own if the Units they hold are redeemed for
shares.
20
<PAGE> 23
The Secondary Shares offered by this Prospectus may be offered from time to
time by the Selling Shareholders named below (based on Common Shares or Units
held at , 1997):
21
<PAGE> 24
[This Page Intentionally Left Blank]
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<PAGE> 25
EXCHANGE OF UNITS
GENERAL
Pursuant to the Operating Partnership Agreement and except as described
below, the Limited Partners have the Exchange Rights, which, subject to the
Ownership Limit, enable each of them to exchange all or a portion of their
Units in the Operating Partnership to the Company for Common Shares or, at the
election of the Company, for cash (the "Cash Amount") equal to the then-current
fair market value of the number of Common Shares for which such Units are
exchangeable. The Exchange Rights relating to the Original Units became
exercisable by the Limited Partners from time to time, in whole or in part,
commencing on April 28, 1995; provided, however, that a Limited Partner has not
been and is not permitted to exercise the Exchange Rights if and to the extent
the issuance of Common Shares to such Limited Partner would violate the
Ownership Limit. See "Description of Shares of the Company -- Ownership Limits
and Restrictions on Transfer." In addition, all the Original Units were subject
to the lock-up and security agreement in the Registration Rights Agreement that
prohibited the exercise of the Exchange Rights until May 16, 1995. The Exchange
Rights with respect to the RER Units became exercisable following the approval
of the holders of a majority of the Company's outstanding Common Shares at the
Company's Annual Meeting held on June 12, 1995.
Pursuant to the Exchange Rights, the Units are exchangeable into Common
Shares (or the cash equivalent thereof) on a one-for-one basis. This one-for-one
exchange ratio will be adjusted from time to time to reflect stock dividends,
stock splits or reverse stock splits. The Exchange Rights also grant an
exchanging Unit holder the right to receive (or to receive the cash equivalent
of) any rights, options, warrants or other securities issued to all
shareholders. If the Company elects to exchange the Units for cash and raises
such funds through a public offering of its securities, by borrowing or
otherwise, the price otherwise payable for the offered Units will be reduced by
the amount equal to the transaction expenses incurred by the Company in raising
such funds (but not exceeding 5% of the total amount paid for the Units computed
without regard to such expenses).
To require the Company to exchange Units, a Limited Partner must send a
Notice of Exchange (in the form attached as an exhibit to the Operating
Partnership Agreement, a copy of which is available from the Company)
accompanied by any certificate or certificates evidencing the Units to be
exchanged. To the extent that delivery of Exchange Shares would cause the
exchanging Unit holder to violate the Ownership Limit, the Company may not
deliver Exchange Shares to such Unit holder but may, in its sole and absolute
discretion, elect either (i) to pay the consideration to such Unit holder in the
form of the Cash Amount or (ii) refuse, in whole or in part, to accept the
Notice of Exchange.
TAX CONSEQUENCES OF EXCHANGE
The following discussion summarizes certain federal income tax
considerations that may be relevant to a Limited Partner who exercises the right
to require the exchange of his or its Units.
Tax Treatment of Exchange of Units. If the Company exchanges the Units for
Common Shares or cash, the exchange will be treated by the Company, the
Operating Partnership and the exchanging Limited Partner as a sale of Units by
such Limited Partner to the Company at the time of such exchange. In that event,
such sale will be fully taxable to the exchanging Limited Partner and such
exchanging Limited Partner will be treated as realizing for tax purposes an
amount equal to the sum of the cash and the value of the Common Shares received
in the exchange plus the amount of Operating Partnership nonrecourse liabilities
allocable to the exchanged Units at the time of the redemption. The
determination of the amount of gain or loss is discussed more fully below.
Tax Treatment of Disposition of Units by Limited Partner Generally. If a
Unit is exchanged in a manner that is treated as a sale of the Unit, or a
Limited Partner otherwise disposes of a Unit, the determination of gain or loss
from the sale or other disposition will be based on the difference between the
amount considered realized for tax purposes and the tax basis in such Unit. See
"-- Basis of Units," below. Upon the sale of a Unit, the "amount realized" will
be measured by the sum of the cash and fair market value
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<PAGE> 26
of other property (e.g., Exchange Shares) received plus the portion of the
Operating Partnership's nonrecourse liabilities allocable to the Unit sold. To
the extent that the sum of the amount of cash and the fair market value of
property received plus the allocable share of the Operating Partnership's
nonrecourse liabilities exceeds the Limited Partner's basis for the Unit
disposed of, such Limited Partner will recognize gain. It is possible that the
amount of gain recognized or even the tax liability resulting from such gain
could exceed the amount of cash and the value of any other property (e.g.,
Exchange Shares) received upon such disposition.
Except as described below, any gain recognized upon a sale or other
disposition of Units will be treated as gain attributable to the sale or
disposition of a capital asset. To the extent, however, that the amount realized
upon the sale of a Unit attributable to a Limited Partner's share of "unrealized
receivables" of the Operating Partnership (as defined in Section 751 of the
Code) exceeds the basis attributable to those assets, such excess will be
treated as ordinary income. Unrealized receivables include, to the extent not
previously included in Operating Partnership income, any rights to payment for
services rendered or to be rendered. Unrealized receivables also include amounts
that would be subject to recapture as ordinary income if the Operating
Partnership had sold its assets at their fair market value at the time of the
transfer of a Unit.
Basis of Units. In general, a Limited Partner who contributed property at
the time of his or its admission to the Operating Partnership had an initial tax
basis in his or its Units ("Initial Basis") equal to his or its basis in his or
its contributed property at the time of such contribution. A Limited Partner's
Initial Basis in his or its Units generally is increased by (a) such Limited
Partner's share of Operating Partnership taxable income and (b) increases in his
or its share of liabilities of the Operating Partnership (including any increase
in his or its share of nonrecourse liabilities of the Operating Partnership).
Generally, such Partner's basis in his or its Units is decreased (but not below
zero) by (i) his or its share of Operating Partnership distributions, (ii)
decreases in his or its share of liabilities of the Operating Partnership
(including any decrease in his or its share of nonrecourse liabilities of the
Operating Partnership), (iii) his or its share of losses of the Operating
Partnership, and (iv) his or its share of nondeductible expenditures of the
Operating Partnership that are not chargeable to capital. A Limited Partner is
considered to have the same basis in each of his or its Units. Thus, although a
Limited Partner may have received Units in respect of more than one transaction,
his or its basis in each Unit is the average of the basis in all Units.
Potential Application of the Disguised Sale Regulations to an Exchange of
Units. There is a risk that an exchange of Units may cause the original
transfer of property to the Operating Partnership by the Limited Partner in
exchange for Units to be treated as a "disguised sale" of property. The Code and
the United States Department of Treasury regulations promulgated thereunder
("Treasury Regulations," and as they apply to a "disguised sale," the "Disguised
Sale Regulations") generally provide that, unless one of the prescribed
exceptions is applicable, a partner's contribution of property to a partnership
and a simultaneous or subsequent transfer of money or other consideration
(including the assumption of or taking subject to a liability) from the
partnership to the partner will be presumed to be a sale, in whole or in part,
of such property by the partner to the partnership. Further, the Disguised Sale
Regulations provide generally that in the absence of an applicable exception, if
money or other consideration is transferred by a partnership to a partner within
two years of the partner's contribution of property, the transactions are
presumed to be a sale of the contributed property unless the facts and
circumstances clearly establish that the transfers do not constitute a sale. The
Disguised Sale Regulations also provide that if two years have passed between
the transfer of money or other consideration and the contribution of property,
the transactions will not be presumed to be a sale unless the facts and
circumstances clearly establish that the transfers constitute a sale.
If a Unit is exchanged, the IRS could contend that the Disguised Sale
Regulations apply because as a result of the exchange a Limited Partner receives
cash or Common Shares subsequent to the Limited Partner's previous contribution
of property to the Operating Partnership. In that event, the IRS would contend
that the transactions relating to the formation of the Company themselves were
taxable as a disguised sale under the Disguised Sale Regulations.
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<PAGE> 27
COMPARISON OF OWNERSHIP OF UNITS AND COMMON SHARES
Generally, the nature of an investment in Common Shares of the Company is
substantially equivalent economically to an investment in Units in the Operating
Partnership. A holder of Common Shares receives the same distribution that a
holder of a Unit receives and shareholders and Unit holders generally share in
the risks and rewards of ownership in the enterprise being conducted by the
Company (through the Operating Partnership). However, there are some differences
between ownership of Units and ownership of Common Shares, some of which may be
material to investors.
The information below highlights a number of the significant differences
between the Operating Partnership and the Company relating to, among other
things, form of organization, permitted investments, policies and restrictions,
management structure, compensation and fees, investor rights and federal income
taxation, and compares certain legal rights associated with the ownership of
Units and Common Shares, respectively. These comparisons are intended to assist
Limited Partners of the Operating Partnership in understanding how their
investment will be changed if their Units are exchanged for Common Shares. THIS
DISCUSSION IS SUMMARY IN NATURE AND DOES NOT CONSTITUTE A COMPLETE DISCUSSION OF
THESE MATTERS, AND HOLDERS OF UNITS SHOULD CAREFULLY REVIEW THE BALANCE OF THIS
PROSPECTUS AND THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART FOR
ADDITIONAL IMPORTANT INFORMATION ABOUT THE COMPANY.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
FORM OF ORGANIZATION AND ASSETS OWNED
<S> <C>
The Operating Partnership is organized as a The Company is organized as a Texas real
Delaware limited partnership. The Operating estate investment trust. The Company (and the
Partnership owns (through its subsidiaries) Predecessor Corporation) elected to be taxed
the Properties and the Biltmore Note. See as a REIT under the Code, commencing with its
"The Company." taxable year ended December 31, 1994, and
intends to maintain its qualification as a
REIT. Its only assets are its interests
(directly and through a subsidiary
corporation) in the Operating Partnership and
in certain corporations that own up to 1% of
limited partnerships in which the Operating
Partnership also owns an interest, which
gives the Company an indirect investment in
the Properties and the Biltmore Note.
<CAPTION>
LENGTH OF INVESTMENT
<S> <C>
The Operating Partnership will terminate on The Company has a perpetual term and intends
December 31, 2093, unless earlier dissolved to continue its operations for an indefinite
in accordance with the terms of the Operating time period.
Partnership Agreement or as otherwise
provided by law. See "Description of
Units -- Term."
</TABLE>
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<PAGE> 28
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
MANAGEMENT CONTROL
<S> <C>
All management powers over the business and The Board of Trust Managers has exclusive
affairs of the Operating Partnership are control over the Company's business and
vested in the General Partner, and no Limited affairs subject only to the restrictions in
Partner has any right to participate in or the Declaration of Trust and Bylaws and the
exercise control or management power over the Operating Partnership Agreement. The Board of
business and affairs of the Operating Trust Managers is classified into three
Partnership. The General Partner has the classes of trust managers. At each annual
power to amend the Operating Partnership meeting of the shareholders, the successors
Agreement to (i) add to the obligations of of the class of trust managers whose terms
the General Partner or surrender any right or expire at that meeting will be elected. The
power granted to the General Partner or its policies adopted by the Board of Trust
affiliates for the benefit of the Limited Managers may be altered or eliminated without
Partners, (ii) reflect the admission, a vote of the shareholders. Accordingly,
substitution, termination or withdrawal of except for their vote in the elections of
partners in accordance with the terms of trust managers, shareholders have no control
Operating Partnership Agreement, (iii) over the ordinary business policies of the
reflect an inconsequential change that has no Company. The Board of Trust Managers cannot
material adverse effect on the Limited change the policy of the Company of
Partners, (iv) cure an ambiguity, or correct maintaining its status as a REIT for federal
or supplement the Operating Partnership income tax purposes, however, without the
Agreement in a manner not inconsistent with approval of holders of majority of the
law or the other provisions of the Operating outstanding Common Shares.
Partnership Agreement, or (v) make other
changes with respect to matters arising under
the Operating Partnership Agreement not
inconsistent with law or the provisions of
the Operating Partnership Agreement. However,
any other amendments to the Operating
Partnership Agreement require the consent of
a majority in interest of the Limited
Partners, and the Operating Partnership
Agreement cannot be amended without the prior
written consent of each partner adversely
affected if such amendment would (i) convert
a Limited Partner's interest in the Operating
Partnership into a General Partner's inter-
est; (ii) modify the limited liability of a
Limited Partner; (iii) except as expressly
permitted by the Operating Partnership
Agreement, alter rights of a partner to
receive distributions pursuant to the Oper-
ating Partnership Agreement, or the
allocations specified in the Operating
Partnership Agreement; (iv) alter or modify
the Exchange Rights; (v) cause the
termination of the Operating Partnership
prior to the expiration of its term; or (vi)
amend the section of the Operating
Partnership Agreement setting forth these
consent rights. The General Partner may not
be removed by the Limited Partners with or
without cause.
</TABLE>
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<PAGE> 29
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
FIDUCIARY DUTIES
<S> <C>
Under Delaware law, the General Partner is Under Texas law, the trust managers must
accountable to the Operating Partnership as a perform their duties in good faith in a
fiduciary and, consequently, is required to manner that they reasonably believe to be in
exercise good faith and integrity in all of the best interests of the Company. Trust
its dealings with respect to partnership managers of the Company who act in such a
affairs. Under the Operating Partnership manner generally will not be liable to the
Agreement, however, the General Partner is Company for monetary damages arising from
under no obligation to take into account the their activities.
tax consequences to any partner of any action
taken by it, and the General Partner is not
liable for monetary damages for losses
sustained or liabilities incurred by partners
as a result of errors of judgment or of any
act or omission, provided that the General
Partner has acted in good faith.
<CAPTION>
MANAGEMENT LIABILITY AND INDEMNIFICATION
<S> <C>
As a matter of Delaware law, the General The Declaration of Trust provides that the
Partner has liability for the payment of the trust managers and officers of the Company
obligations and debts of the Operating will not be liable to the Company and its
Partnership unless limitations upon such shareholders for money damages except for
liability are stated in the document or certain liabilities if the person (i) is
instrument evidencing the obligation. Under found liable to the Company or (ii) is found
the Operating Partnership Agreement, the liable on the basis that the person
Operating Partnership has agreed to indemnify improperly received a personal benefit. The
the Company, the General Partner and their Declaration of Trust and Bylaws require the
wholly owned subsidiaries (the "Crescent Company to indemnify its trust managers and
Group") and any director or officer of the officers to the fullest extent permitted
members of the Crescent Group (the "Indemni- under Texas law, thereby generally providing
tees") from and against all losses, claims, indemnification to the same extent that
damages, liabilities, joint or several, indemnification is provided under the
expenses (including legal fees and expenses), Operating Partnership Agreement.
judgments, fines, settlements and other
amounts incurred in connection with any ac-
tions relating to the operations of the
Operating Partnership in which the Indemnitee
is involved, unless (i) the act was in bad
faith and was material to the action; (ii)
the Indemnitee received an improper personal
benefit; or (iii) in the case of any criminal
proceeding, the Indemnitee had reasonable
cause to believe the act or omission was
unlawful. The reasonable expenses incurred by
an Indemnitee may be reimbursed by the
Operating Partnership in advance of the final
disposition of the proceeding upon receipt by
the Operating Partnership of an affirmation
by such Indemnitee of his, her or its good
faith belief that the standard of conduct
necessary for indemnification has been met
and an undertaking by such Indemnitee to
repay the amount if it is determined that
such standard was not met.
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
ANTITAKEOVER PROVISIONS
<S> <C>
Except in limited circumstances (see The Declaration of Trust and Bylaws of the
"-- Voting Rights" below), the General Company contain a number of provisions that
Partner has exclusive management power over may have the effect of delaying or
the business and affairs of the Operating discouraging an unsolicited proposal for the
Partnership. The General Partner may not be acquisition of the Company or the removal of
removed by the Limited Partners with or incumbent management. These provisions
without cause. See "Description of Units." include, among others: (i) a staggered Board
of Trust Managers; (ii) authorized capital
stock that may be issued as Preferred Shares
in the discretion of the Board of Trust
Managers, with voting rights superior to
those of Common Shares; (iii) a requirement
that, subject to any rights of holders of the
Company's Preferred Shares, trust managers
may be removed only for cause and only by a
vote of holders of at least 80% of the
then-outstanding Common Shares entitled to
vote, voting together as a single class; and
(iv) provisions designed to avoid
concentration of share ownership in a manner
that would jeopardize the status of the
Company as a REIT under the Code. See
"Description of Shares of the Company" for a
more detailed explanation of these provisions
as well as a description of certain other
provisions that could have the effect of
inhibiting or impeding acquisition of control
of the Company.
<CAPTION>
VOTING RIGHTS
<S> <C>
Under the Operating Partnership Agreement, The Company is managed and controlled by a
the Limited Partners have limited voting Board of Trust Managers consisting of three
rights as described more fully below. classes having staggered terms of office.
Otherwise, all decisions relating to the Each class is to be elected by the
operation and management of the Operating shareholders at annual meetings of the Com-
Partnership are made by the General Partner. pany. Texas law requires that certain major
See "Description of Units -- Management." corporate transactions, including most
amendments to the Declaration of Trust, may
not be consummated without the approval of
shareholders as set forth below. All Common
Shares have one vote, and the Declaration of
Trust permits the Board of Trust Managers to
classify and issue Preferred Shares in one or
more series having voting power which may
differ from that of the Common Shares. See
"Description of Shares of the Company."
</TABLE>
28
<PAGE> 31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
The following is a comparison of the voting rights of the Limited Partners of the
Operating Partnership and the shareholders of the Company as they relate to certain major
transactions.
AMENDMENT OF THE OPERATING PARTNERSHIP AGREEMENT OR THE DECLARATION OF TRUST
<S> <C>
The Operating Partnership Agreement may be Amendments to the Declaration of Trust must
amended through a proposal by the General be approved by the Board of Trust Managers
Partner. Such proposal, in order to be and by the vote of at least two-thirds of the
effective, must be approved by the General votes entitled to be cast at a meeting of
Partner and by Limited Partners owning a shareholders.
majority-in-interest of the total outstanding
partnership interests. Certain amendments
that affect the fundamental rights of a
Limited Partner must be approved by each
affected Limited Partner. In addition, the
General Partner may, without the consent of
the Limited Partners, amend the Operating
Partnership Agreement as to certain min-
isterial matters. See "-- Management
Control," above.
<CAPTION>
VOTE REQUIRED TO DISSOLVE THE OPERATING PARTNERSHIP OR THE COMPANY
<S> <C>
The General Partner may dissolve the Under Texas law, the Board of Trust Managers
Operating Partnership without the consent of must obtain approval of holders of at least
the Limited Partners in its sole discretion. two-thirds of the outstanding Common Shares
in order to dissolve the Company.
<CAPTION>
VOTE REQUIRED TO SELL ASSETS OR MERGE
<S> <C>
Under the Operating Partnership Agreement, Under Texas law, the sale of all or
the sale, exchange, transfer or other substantially all of the assets of the
disposition of all or substantially all of Company or merger or consolidation of the
the Operating Partnership's assets or merger Company requires the approval of the Board of
or consolidation of the Operating Partner- Trust Managers and by the vote of at least
ship does not require the consent of the two-thirds of the votes entitled to be cast
Limited Partners. at a meeting of shareholders. No approval of
the shareholders is required for the sale of
less than all or substantially all of the
assets of the Company.
<CAPTION>
COMPENSATION, FEES AND DISTRIBUTIONS
<S> <C>
The General Partner does not receive any The trust managers and officers of the
compensation for its service as general Company receive compensation for their
partner of the Operating Partnership. As a services.
partner in the Operating Partnership,
however, the General Partner has the same
right to allocations and distributions as
other partners of the Operating Partnership.
In addition, the Operating Partnership will
reimburse the General Partner and other
members of the Crescent Group for all ex-
penses incurred relating to the ongoing
operation of the Company and any other
offering of additional partnership interests
in the Operating Partnership or capital stock
of the Company.
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
LIABILITY OF INVESTORS
<S> <C>
Under the Operating Partnership Agreement and Under Texas law, holders of Common Shares are
applicable state law, the liability of the not personally liable for any contractual
Limited Partners for the Operating obligation of the Company on the basis (i)
Partnership's debts and obligations is that the person is or was the alter ego of
generally limited to the amount of their the Company, or (ii) of actual or
investment in the Operating Partnership. constructive fraud, a sham to perpetrate a
fraud, or similar theory, unless the obligee
demonstrates that the shareholder caused the
Company to be used for the purpose of
perpetrating and did perpetrate an actual
fraud on the obligee primarily for the direct
personal benefit of the shareholder.
<CAPTION>
REVIEW OF INVESTOR LISTS
<S> <C>
Under the Operating Partnership Agreement, a Under Texas law, a shareholder who holds at
Limited Partner of the Operating Partnership, least 5% of the outstanding shares of a real
for a purpose reasonably related to his or estate investment trust or who has held
its interest as a Limited Partner, upon shares of a real estate investment trust for
written demand with a statement of the six months or longer may, upon written
purpose of such demand and at the Limited request, inspect and copy any such trust's
Partner's expense, is entitled to obtain a books and records, including its list of its
current list of the name and last known shareholders of record.
business, residence or mailing address of
each Limited Partner of the Operating
Partnership.
<CAPTION>
NATURE OF INVESTMENT
<S> <C>
The Units constitute equity interests The Common Shares constitute equity interests
entitling each Limited Partner to his or its in the Company. The Company is entitled to
pro rata share of cash distributions made to receive its pro rata share of distributions
the Limited Partners of the Operating made by the Operating Partnership with
Partnership. The Operating Partnership respect to the Units, and each shareholder
generally intends to retain and reinvest will be entitled to his pro rata share of any
proceeds of the sale of property or excess dividends or distributions paid with respect
refinancing proceeds in its business. to the Common Shares. The dividends payable
to the shareholders are not fixed in amount
and are only paid if, when and as declared by
the Board of Trust Managers. In order to
qualify as a REIT for federal income tax
purposes, the Company must distribute at
least 95% of its taxable income (excluding
capital gains), and any taxable income
(including capital gains) not distributed
will be subject to corporate income tax.
<CAPTION>
POTENTIAL DILUTION OF RIGHTS
<S> <C>
The General Partner is authorized, in its The Board of Trust Managers may issue, in its
sole discretion and without Limited Partner discretion, additional Common Shares and have
approval, to cause the Operating Partnership the authority to issue from the authorized
to issue additional limited partnership capital shares a variety of other equity
interests and other equity securities for any securities of the Company with such powers,
partnership purpose at any time to the preferences and rights as the Board of Trust
Limited Partners or to other persons on terms Managers may designate at the time. The
established by the General Partner. issuance of either additional Common Shares
or other similar equity securities may result
in the dilution of the interests of the
shareholders.
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
LIQUIDITY
<S> <C>
Limited Partners generally can transfer their The Exchange Shares will be freely
Units, except that a transferee of a limited transferable as registered securities under
partnership interest generally cannot become the Securities Act. The Common Shares are
a substitute Limited Partner except with the listed on the NYSE. The breadth and strength
consent of the General Partner. Each Limited of this secondary market will depend, among
Partner has the right, subject to the other things, upon the number of shares
Ownership Limit, to tender his Units for ex- outstanding, the Company's financial results
change by the Operating Partnership. and prospects, the general interest in the
Company's and other real estate investments,
and the Company's dividend yield compared to
that of other debt and equity securities.
<CAPTION>
FEDERAL INCOME TAXATION
<S> <C>
The Operating Partnership is not subject to The Company has elected to be taxed as a REIT
federal income taxes. Instead, each holder of for federal income tax purposes. So long as
Units includes his or its allocable share of it qualifies as a REIT, the Company will be
the Operating Partnership's taxable income or permitted to deduct distributions paid to its
loss in determining his or its individual shareholders, which effectively will reduce
federal income tax liability. The maximum the "double taxation" that typically results
federal income tax rate for individuals under when a corporation earns income and distrib-
current law is 39.6%. utes that income to its shareholders in the
form of dividends. A qualified REIT, however,
is subject to federal income tax on income
that is not distributed and also may be
subject to federal income and excise taxes in
certain circumstances. The maximum federal
income tax rate for corporations under
current law is 35%.
Income and loss from the Operating Dividends paid by the Company will be treated
Partnership generally is subject to the as "portfolio" income and cannot be offset
"passive activity" limitations. Under the with losses from "passive activities." The
"passive activity" rules, income and loss maximum federal income tax rate for
from the Operating Partnership that is individuals under current law is 39.6%.
considered "passive income" generally can be
offset against income and loss from other
investments that constitute "passive
activities." The "passive activity" limi-
tations generally apply to individuals,
trusts, estates, personal service
corporations and closely held corporations.
Cash distributions from the Operating Distributions made by the Company to its
Partnership are not taxable to a holder of taxable domestic shareholders out of current
Units except to the extent they exceed such or accumulated earnings and profits will be
holder's basis in his or its interest in the taken into account by them as ordinary
Operating Partnership (which will include income. Distributions that are designated as
such holder's allocable share of the capital gain dividends generally will be
Operating Partnership's nonrecourse debt). taxed as long-term capital gain, subject to
certain limitations. Distributions in excess
of current or accumulated earnings and
profits will be treated as a non-taxable
return of basis to the extent of a
shareholder's adjusted basis in its Common
Shares, with the excess taxed as capital
gain.
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPERATING PARTNERSHIP COMPANY
- ---------------------------------------------------------------------------------------------
<S> <C>
Each year, holders of Units will receive a Each year, shareholders will receive Form
Schedule K-I tax form containing detailed tax 1099 used by corporations to report dividends
information for inclusion in preparing their paid to their shareholders.
federal income tax returns.
Holders of Units may be required, in some Shareholders who are individuals generally
cases, to file state income tax returns will not be required to file state income tax
and/or pay state income taxes in the states returns and/or pay state income taxes outside
in which the Operating Partnership owns of their state of residence with respect to
property, even if they are not residents of the operations and distributions of the
those states. Company. The Company may be required to pay
state income taxes in certain states.
</TABLE>
32
<PAGE> 35
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following is a summary of the material federal income tax
considerations associated with an investment in the Common Shares offered hereby
prepared by Shaw, Pittman, Potts & Trowbridge, tax counsel to Crescent Equities
("Tax Counsel"). This discussion is based upon the laws, regulations and
reported rulings and decisions in effect as of the date of this Prospectus
Supplement, all of which are subject to change, retroactively or prospectively,
and to possibly differing interpretations. This discussion does not purport to
deal with the federal income or other tax consequences applicable to all
investors in light of their particular investment circumstances or to all
categories of investors, some of whom may be subject to special rules
(including, for example, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who are
not citizens or residents of the United States). No ruling on the federal, state
or local tax considerations relevant to the operation of Crescent Equities or
the Operating Partnership or to the purchase, ownership or disposition of the
Common Shares is being requested from the Internal Revenue Service (the "IRS")
or from any other tax authority. Tax Counsel has rendered certain opinions
discussed herein and believes that if the IRS were to challenge the conclusions
of Tax Counsel, such conclusions would prevail in court. However, opinions of
counsel are not binding on the IRS or on the courts, and no assurance can be
given that the conclusions reached by Tax Counsel would be sustained in court.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF THE COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL
ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER
TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND ELECTION AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF CRESCENT EQUITIES
Crescent Equities has made an election to be treated as a real estate
investment trust under Sections 856 through 860 of the Code (as used in this
section, a "REIT"), commencing with its taxable year ended December 31, 1994.
Crescent Equities believes that it was organized and has operated in such a
manner so as to qualify as a REIT, and Crescent Equities intends to continue to
operate in such a manner, but no assurance can be given that it has operated in
a manner so as to qualify, or will operate in a manner so as to continue to
qualify as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following sets forth the material aspects
of the Code sections that govern the federal income tax treatment of a REIT and
its shareholders. This summary is qualified in its entirety by the applicable
Code sections, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
In the opinion of Tax Counsel, Crescent Equities qualified as a REIT under
the Code with respect to its taxable years ending on or before December 31,
1996, and is organized in conformity with the requirements for qualification as
a REIT, its manner of operation has enabled it to meet the requirements for
qualification as a REIT as of the date of this Prospectus Supplement, and its
proposed manner of operation will enable it to meet the requirements for
qualification as a REIT in the future. It must be emphasized that this opinion
is based on various assumptions relating to the organization and operation of
Crescent Equities and the Operating Partnership and is conditioned upon certain
representations made by Crescent Equities and the Operating Partnership as to
certain relevant factual matters, including matters related to the organization,
expected operation, and assets of Crescent Equities and the Operating
Partnership. Moreover, continued qualification as a REIT will depend upon
Crescent Equities' ability to meet, through actual annual operating results, the
distribution levels, stock ownership requirements and the various qualification
tests and other requirements imposed under the Code, as discussed below.
Accordingly, no assurance can be given that the actual stock ownership of
Crescent Equities, the mix of its assets, or the results of its operations for
any
33
<PAGE> 36
particular taxable year will satisfy such requirements. For a discussion of the
tax consequences of failing to qualify as a REIT, see "-- Taxation of Crescent
Equities -- Failure to Qualify," below.
If Crescent Equities qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to shareholders. This treatment substantially eliminates
the "double taxation" (at the corporate and shareholder levels) that generally
results from investments in a corporation. However, Crescent Equities will be
subject to federal income tax in the following circumstances. First, Crescent
Equities will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including undistributed net capital
gains. Second, under certain circumstances, Crescent Equities may be subject to
the "alternative minimum tax" on its items of tax preference. Third, if Crescent
Equities has "net income from foreclosure property," it will be subject to tax
on such income at the highest corporate rate. "Foreclosure property" generally
means real property and any personal property incident to such real property
which is acquired as a result of a default either on a lease of such property or
on indebtedness which such property secured and with respect to which an
appropriate election is made, except that property ceases to be foreclosure
property (i) after a two-year period (which in certain cases may be extended by
the IRS) or, if earlier, (ii) when the REIT engages in construction on the
property (other than for completion of certain improvements) or for more than 90
days uses the property in a business conducted other than through an independent
contractor. "Net income from foreclosure property" means (a) the net gain from
disposition of foreclosure property which is held primarily for sale to
customers in the ordinary course of business or (b) other net income from
foreclosure property which would not satisfy the 75% gross income test
(discussed below). Property is not eligible for the election to be treated as
foreclosure property if the loan or lease with respect to which the default
occurs (or is imminent) was made, entered into or acquired by the REIT with an
intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if Crescent Equities has "net income derived from
prohibited transactions," such income will be subject to a 100% tax. The term
"prohibited transaction" generally includes a sale or other disposition of
property (other than foreclosure property) that is held primarily for sale to
customers in the ordinary course of business. Fifth, if Crescent Equities should
fail to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Crescent Equities fails the 75% or 95% test. Sixth, if, during each calendar
year, Crescent Equities fails to distribute at least the sum of (i) 85% of its
"real estate investment trust ordinary income" for such year, (ii) 95% of its
"real estate investment trust capital gain net income" for such year, and (iii)
any undistributed taxable income from prior periods, Crescent Equities will be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. Seventh, if Crescent Equities acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate
level tax) in a transaction in which the basis of the asset in Crescent
Equities' hands is determined by reference to the basis of the asset (or any
other property) in the hands of the corporation, and Crescent Equities
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which such asset was acquired by Crescent Equities,
then, to the extent of such property's "built-in" gain (the excess of the fair
market value of such property at the time of acquisition by Crescent Equities
over the adjusted basis in such property at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
Treasury Regulations that have not yet been promulgated). (The results described
above with respect to the recognition of "built-in gain" assume that Crescent
Equities will make an election pursuant to IRS Notice 88-19.)
Requirements of Qualification. The Code defines a REIT as a corporation,
trust or association (1) which is managed by one or more trustees or trust
managers; (2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (3) which would
be taxable as a domestic corporation, but for Sections 856 through 860 of the
Code; (4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of which
is held (without reference to any rules of attribution) by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code); and (7) which meets certain other tests,
described below, regarding certain distributions and the nature of its income
and assets and properly files
34
<PAGE> 37
an election to be treated as a REIT. The Code provides that conditions (1)
through (4), inclusive, must be met during the entire taxable year and that
condition (5) must be met during at least 335 days of a taxable year of 12
months (or during a proportionate part of a taxable year of less than 12
months).
Crescent Equities issued sufficient Common Shares pursuant to its initial
public offering in 1994 to satisfy the requirements described in (5) and (6)
above. While the existence of the Exchange Rights may cause Limited Partners to
be deemed to own the Common Shares they could acquire through the Exchange
Rights, the amount of Common Shares that can be acquired at any time through the
Exchange Rights is limited to an amount which, together with any other Common
Shares actually or constructively deemed, under the Declaration of Trust, to be
owned by any person, does not exceed the Ownership Limit. See "Description of
Shares of the Company -- Ownership Limits and Restrictions on Transfer."
Moreover, the ownership of Common Shares by persons other than contributing
Limited Partners generally is limited under the Ownership Limit to no more than
8.0% of the outstanding Common Shares. In addition, the Declaration of Trust
provides for restrictions regarding the ownership or transfer of Common Shares
in order to assist Crescent Equities in continuing to satisfy the share
ownership requirements described in (5) and (6) above. See "Description of
Shares of the Company -- Ownership Limits and Restrictions on Transfer."
If a REIT owns a "qualified REIT subsidiary," the Code provides that the
qualified REIT subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
qualified REIT subsidiary are treated as assets, liabilities and such items of
the REIT itself. A qualified REIT subsidiary is a corporation all of the capital
stock of which has been owned by the REIT from the commencement of such
corporation's existence. CREE Ltd., Management I, Management II, Management III,
Management IV and Management V are qualified REIT subsidiaries, and thus all of
the assets (i.e., the respective partnership interests in the Operating
Partnership, Funding I, Funding II, Funding III, Funding IV and Funding V),
liabilities and items of income, deduction and credit of CREE Ltd., Management
I, Management II, Management III, Management IV and Management V are treated as
assets and liabilities and items of income, deduction and credit of Crescent
Equities. Unless otherwise required, all references to Crescent Equities in this
"Federal Income Tax Considerations" section refer to Crescent Equities and its
qualified REIT subsidiaries.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the assets and gross
income (as defined in the Code) of the partnership attributed to the REIT shall
retain the same character as in the hands of the partnership for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
assets tests described below. Thus, Crescent Equities' proportionate share of
the assets, liabilities and items of income of the Operating Partnerships and
its subsidiary partnerships are treated as assets, liabilities and items of
income of Crescent Equities for purposes of applying the requirements described
herein.
Income Tests. In order for Crescent Equities to achieve and maintain its
qualification as a REIT, there are three requirements relating to Crescent
Equities' gross income that must be satisfied annually. First, at least 75% of
Crescent Equities' gross income (excluding gross income from prohibited
transactions) for each taxable year must consist of temporary investment income
or of certain defined categories of income derived directly or indirectly from
investments relating to real property or mortgages on real property. These
categories include, subject to various limitations, rents from real property,
interest on mortgages on real property, gains from the sale or other disposition
of real property (including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the ordinary course of
business, income from foreclosure property, and amounts received as
consideration for entering into either loans secured by real property or
purchases or leases of real property. Second, at least 95% of Crescent Equities'
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from income qualifying under the 75% test and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, for each
taxable year, gain from the sale or other disposition of stock or securities
held for less than one year, gain from prohibited transactions and gain on the
sale or other disposition of real property held for less than four years (apart
from involuntary conversions and sales of foreclosure property) must represent
less than 30% of Crescent Equities' gross income (including gross
35
<PAGE> 38
income from prohibited transactions) for such taxable year. Crescent Equities,
through its partnership interests in the Operating Partnership and all
subsidiary partnerships, believes it satisfied all three of these income tests
for 1994, 1995 and 1996 and expects to satisfy them for subsequent taxable
years.
The bulk of the Operating Partnership's income is currently derived from
rents with respect to the Office Properties, the Hotel Properties and the Retail
Properties. Rents received by Crescent Equities will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described above
only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person. An amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" if the REIT, or an owner
of 10% or more of the REIT, directly or constructively, owns 10% or more of such
tenant (a "Related Party Tenant"). Third, if rent attributable to personal
property leased in connection with a lease of real property is greater than 15%
of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." Finally, for rents to qualify as "rents from real property," a REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no revenue, except that a REIT may directly perform
services which are "usually or customarily rendered" in connection with the
rental of space for occupancy, other than services which are considered to be
rendered to the occupant of the property.
Crescent Equities, based in part upon opinions of Tax Counsel as to whether
various tenants, including the lessees of the Hotel Properties, constitute
Related Party Tenants, believes that the income it received in 1994, 1995, and
1996 and will receive in subsequent taxable years from (i) charging rent for any
property that is based in whole or in part on the income or profits of any
person (except by reason of being based on a percentage or percentages of
receipts or sales, as described above); (ii) charging rent for personal property
in an amount greater than 15% of the total rent received under the applicable
lease; (iii) directly performing services considered to be rendered to the
occupant of property or which are not usually or customarily furnished or
rendered in connection with the rental of real property; or (iv) entering into
any lease with a Related Party Tenant, will not cause Crescent Equities to fail
to meet the gross income tests. Opinions of counsel are not binding upon the IRS
or any court, and there can be no complete assurance that the IRS will not
assert successfully a contrary position.
The Operating Partnership will also receive fixed and contingent interest
on the Residential Development Property Mortgages. Interest on mortgages secured
by real property satisfies the 75% and 95% gross income tests only if it does
not include any amount whose determination depends in whole or in part on the
income of any person, except that (i) an amount is not excluded from the term
"interest" solely by reason of being based on a fixed percentage or percentages
of receipts or sales and (ii) income derived from a shared appreciation
provision in a mortgage is treated as gain recognized from the sale of the
secured property. Certain of the Residential Development Property Mortgages
contain provisions for contingent interest based upon property sales. In the
opinion of Tax Counsel, each of the Residential Development Property Mortgages
constitutes debt for federal income tax purposes, any contingent interest
derived therefrom will be treated as being based on a fixed percentage of sales,
and therefore all interest derived therefrom will constitute interest received
from mortgages for purposes of the 75% and 95% gross income tests. If, however,
the contingent interest provisions were instead characterized as shared
appreciation provisions, any resulting income would, because the underlying
properties are primarily held for sale to customers in the ordinary course, be
treated as income from prohibited transactions, which would not satisfy the 75%
and 95% gross income tests, which would count toward the 30% gross income test,
and which would be subject to a 100% tax.
In applying the 95% and 75% gross income tests to Crescent Equities, it is
necessary to consider the form in which certain of its assets are held, whether
that form will be respected for federal income tax purposes, and whether, in the
future, such form may change into a new form with different tax attributes (for
example, as a result of a foreclosure on debt held by the Operating
Partnership). For example, the Residential Development Properties are primarily
held for sale to customers in the ordinary course of business, and the income
resulting from such sales, if directly attributed to Crescent Equities, would
not qualify under the 75% and 95% gross
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income tests and would count as gain from the sale of assets for purposes of the
30% limitation. In addition, such income would be considered "net income from
prohibited transactions" and thus would be subject to a 100% tax. The income
from such sales, however, will be earned by the Residential Development
Corporations rather than by the Operating Partnership and will be paid to the
Operating Partnership in the form of interest and principal payments on the
Residential Development Property Mortgages or distributions with respect to the
stock in the Residential Development Corporations held by the Operating
Partnership. In similar fashion, the income earned by the Hotel Properties, if
directly attributed to Crescent Equities, would not qualify under the 75% and
95% gross income tests because it would not constitute "rents from real
property." Such income is, however, earned by the lessees of these Hotel
Properties and what the Operating Partnership receives from the lessees of these
Hotel Properties is rent. Tax Counsel is of the opinion that (i) the Residential
Development Properties or any interest therein will be treated as owned by the
Residential Development Corporations, (ii) amounts derived by the Operating
Partnership from the Residential Development Corporations under the terms of the
Residential Development Property Mortgages will qualify as interest or
principal, as the case may be, paid on mortgages on real property for purposes
of the 75% and 95% gross income tests, (iii) amounts derived by the Operating
Partnership with respect to the stock of the Residential Development
Corporations will be treated as distributions on stock (i.e., as dividends, a
return of capital, or capital gain, depending upon the circumstances) for
purposes of the 75% and 95% gross income tests and (iv) the leases of the Hotel
Properties will be treated as leases for federal income tax purposes, and the
rent payable thereunder will qualify as "rents from real property." Tax Counsel
has provided opinions similar to those provided with respect to the Operating
Partnership's investment in the Residential Development corporations with
respect to its investments in certain other entities through non-voting
securities and secured debt. Investors should be aware that there are no
controlling Treasury Regulations, published rulings, or judicial decisions
involving transactions with terms substantially the same as those with respect
to the Residential Development Corporations and the leases of the Hotel
Properties. Therefore, the opinions of Tax Counsel with respect to these matters
are based upon all of the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous. Opinions of
counsel are not binding upon the IRS or any court, and there can be no complete
assurance that the IRS will not assert successfully a contrary position. If one
or more of the Hotel Properties leases is not a true lease, part or all of the
payments that the Operating Partnership receives from the respective lessee may
not satisfy the various requirements for qualification as "rents from real
property," or the Operating Partnership might be considered to operate the Hotel
Properties directly. In that case, Crescent Equities likely would not be able to
satisfy either the 75% or 95% gross income tests and, as a result, likely would
lose its REIT status. Similarly, if the IRS were to challenge successfully the
arrangements with the Residential Development Corporations, Crescent Equities'
qualification as a REIT could be jeopardized.
If any of the Residential Development Properties were to be acquired by the
Operating Partnership as a result of foreclosure on any of the Residential
Development Property Mortgages, or if any of the Hotel Properties were to be
operated directly by the Operating Partnership or a subsidiary partnership as a
result of a default by the lessee under the lease, such property would
constitute foreclosure property for two years following its acquisition (or for
up to an additional four years if an extension is granted by the IRS), provided
that (i) the Operating Partnership or its subsidiary partnership conducts sales
or operations through an independent contractor; (ii) the Operating Partnership
or its subsidiary partnership does not undertake any construction on the
foreclosed property other than completion of improvements which were more than
10% complete before default became imminent; and (iii) foreclosure was not
regarded as foreseeable at the time Crescent Equities acquired the Residential
Development Property Mortgages or leased the Hotel Properties. For so long as
any of these properties constitutes foreclosure property, the income from such
sales would be subject to tax at the maximum corporate rates and would qualify
under the 75% and 95% gross income tests. However, if any of these properties
does not constitute foreclosure property at any time in the future, income
earned from the disposition or operation of such property will not qualify under
the 75% and 95% gross income tests and, in the case of the Residential
Development Properties, will count toward the 30% test and will be subject to
the 100% tax.
Crescent Equities anticipates that it will have certain income which will
not satisfy the 75% or the 95% gross income test and/or which will constitute
income whose receipt could cause Crescent Equities not to
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comply with the 30% gross income test. For example, income from dividends on the
stock of the Residential Development Corporations will not satisfy the 75% gross
income test. It is also possible that certain income resulting from the use of
creative financing or acquisition techniques would not satisfy the 75%, 95%, or
30% gross income tests. Crescent Equities believes, however, that the aggregate
amount of nonqualifying income will not cause Crescent Equities to exceed the
limits on nonqualifying income under the 75%, 95% or 30% gross income tests.
Any gross income derived from a prohibited transaction is taken into
account in applying the 30% gross income test necessary to qualify as a REIT.
Crescent Equities believes that no asset owned by the Operating Partnership is
primarily held for sale to customers and that the sale of any of the Properties
will not be in the ordinary course of business. Whether property is held
primarily for sale to customers in the ordinary course of business depends,
however, on the facts and circumstances in effect from time to time, including
those related to a particular property. No assurance can be given that Crescent
Equities can (a) comply with certain safe-harbor provisions of the Code which
provide that certain sales do not constitute prohibited transactions or (b)
avoid owning property that may be characterized as property held primarily for
sale to customers in the ordinary course of business.
If Crescent Equities fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if Crescent Equities'
failure to meet such tests is due to reasonable cause and not to willful
neglect, Crescent Equities attaches a schedule of the sources of its income to
its tax return, and any incorrect information on the schedule is not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances Crescent Equities would be entitled to the benefit of these
relief provisions. As discussed above, even if these relief provisions apply, a
tax would be imposed with respect to the excess of 75% or 95% of Crescent
Equities' gross income over Crescent Equities' qualifying income in the relevant
category, whichever is greater.
Asset Tests. Crescent Equities, at the close of each quarter of its
taxable year, must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of Crescent Equities' total assets must
be represented by real estate assets (including (i) its allocable share of real
estate assets held by the Operating Partnership, any partnerships in which the
Operating Partnership owns an interest, or qualified REIT subsidiaries of
Crescent Equities and (ii) stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of Crescent Equities), cash, cash items and government
securities. Second, not more than 25% of Crescent Equities' total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by Crescent Equities may not exceed 5% of the value of Crescent
Equities' total assets, and Crescent Equities may not own more than 10% of any
one issuer's outstanding voting securities. The 25% and 5% tests generally must
be met for any quarter in which Crescent Equities acquires securities of an
issuer. Thus, this requirement must be satisfied not only on the date Crescent
Equities first acquires corporate securities, but also each time Crescent
Equities increases its ownership of corporate securities (including as a result
of increasing its interest in the Operating Partnership by acquiring Units from
Limited Partners upon the exercise of their Exchange Rights).
The Operating Partnership owns 100% of the non-voting stock of each
Residential Development Corporation. In addition, the Operating Partnership owns
the Residential Development Property Mortgages. As stated above, in the opinion
of Tax Counsel each of these mortgages will constitute debt for federal income
tax purposes and therefore will be treated as a real estate asset; however, the
IRS could assert that such mortgages should be treated as equity interests in
their respective issuers, which would not qualify as real estate assets. By
virtue of its ownership of partnership interests in the Operating Partnership,
Crescent Equities will be considered to own its pro rata share of these assets.
Neither Crescent Equities nor the Operating Partnership, however, will directly
own more than 10% of the voting securities of any Residential Development
Corporation and, in the opinion of Tax Counsel, Crescent Equities will not be
considered to own any of such voting securities. In addition, Crescent Equities
and its senior management believe that Crescent Equities' pro rata share of the
value of the securities of each Residential Development Corporation do not
separately exceed 5% of the total value of Crescent Equities' total assets. This
belief is based in part upon its
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analysis of the estimated values of the various securities owned by the
Operating Partnership relative to the estimated value of the total assets owned
by the Operating Partnership. No independent appraisals will be obtained to
support this conclusion, and Tax Counsel, in rendering its opinion as to the
qualification of Crescent Equities as a REIT, is relying on the conclusions of
Crescent Equities and its senior management as to the value of the various
securities and other assets. There can be no assurance, however, that the IRS
might not contend that the values of the various securities held by Crescent
Equities through the Operating Partnership separately exceed the 5% value
limitation or, in the aggregate, exceed the 25% value limitation or that the
voting securities of the Residential Development Corporations should be
considered to be owned by Crescent Equities. Finally, if the Operating
Partnership were treated for tax purposes as a corporation rather than as a
partnership, Crescent Equities would violate the 10% of voting securities and 5%
of value limitations, and the treatment of any of the Operating Partnership's
subsidiary partnerships as a corporation rather than as a partnership could also
violate one or the other, or both, of these limitations. In the opinion of Tax
Counsel, for federal income tax purposes the Operating Partnership and all the
subsidiary partnerships will be treated as partnerships and not as either
associations taxable as corporations or publicly traded partnerships. See
"-- Tax Aspects of the Operating Partnership and the Subsidiary Partnerships,"
below.
As noted above, the 5% and 25% value requirements must be satisfied not
only on the date Crescent Equities first acquires corporate securities, but also
each time Crescent Equities increases its ownership of corporate securities
(including as a result of increasing its interest in the Operating Partnership
either with the proceeds of this Offering or by acquiring Units from Limited
Partners upon the exercise of their Exchange Rights). Although Crescent Equities
plans to take steps to ensure that it satisfies the 5% and 25% value tests for
any quarter with respect to which retesting is to occur, there can be no
assurance that such steps (i) will always be successful; (ii) will not require a
reduction in Crescent Equities' overall interest in the various corporations; or
(iii) will not restrict the ability of the Residential Development Corporations
to increase the sizes of their respective businesses, unless the value of the
assets of Crescent Equities is increasing at a commensurate rate.
Annual Distribution Requirements. In order to qualify as a REIT, Crescent
Equities is required to distribute dividends (other than capital gains
dividends) to its shareholders in an amount at least equal to (A) the sum of (i)
95% of the "real estate investment trust taxable income" of Crescent Equities
(computed without regard to the dividends paid deduction and Crescent Equities'
net capital gain) and (ii) 95% of the net income (after tax), if any, from
foreclosure property, minus (B) certain excess noncash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before Crescent Equities timely files its tax
return for such year, and if paid on or before the date of the first regular
dividend payment after such declaration. To satisfy the 95% distribution
requirement for 1994, Crescent Equities made a distribution to shareholders in
1995 which it believes was properly attributable to its 1994 tax year in
accordance with the rules described in the preceding sentence. To the extent
that Crescent Equities does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "real estate investment
trust taxable income," as adjusted, it will be subject to tax thereon at regular
capital gains and ordinary corporate tax rates. Furthermore, if Crescent
Equities should fail to distribute, during each calendar year, at least the sum
of (i) 85% of its "real estate investment trust ordinary income" for such year;
(ii) 95% of its "real estate investment trust capital gain income" for such
year; and (iii) any undistributed taxable income from prior periods, Crescent
Equities would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
Crescent Equities believes that it has made and intends to make timely
distributions sufficient to satisfy all annual distribution requirements. In
this regard, the Operating Partnership Agreement authorizes CREE Ltd., as
General Partner, to take such steps as may be necessary to cause the Operating
Partnership to distribute to its partners an amount sufficient to permit
Crescent Equities to meet these distribution requirements. It is possible,
however, that, from time to time, Crescent Equities may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at its "real estate investment trust taxable income."
Issues may also arise as to whether certain items should be included in income.
For example, Tax Counsel has opined that the Operating Partnership should
include in income only its share of the interest
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income actually paid on two mortgage notes purchased by the Company and secured
by two Office Properties ("Mortgage Notes"), both of which were acquired at a
substantial discount, rather than its share of the amount of interest accruing
pursuant to the terms of the these investments, but opinions of counsel are not
binding on the IRS or the courts. In this regard, the IRS has taken a contrary
view in a recent technical advice memorandum concerning the accrual of original
issue discount ("OID"). The Company believes, however, that even if the
Operating Partnership were to include in income the full amount of interest
income accrued on these notes, and the Operating Partnership were not allowed
any offsetting deduction for the amount of such interest to the extent it is
uncollectible, the Company nonetheless would be able to satisfy the 95%
distribution requirement without borrowing additional funds or distributing
stock dividends (as discussed below). In addition, it is possible that certain
creative financing or creative acquisition techniques used by the Operating
Partnership may result in income (such as income from cancellation of
indebtedness or gain upon the receipt of assets in foreclosure whose fair market
value exceeds the Operating Partnership's basis in the debt which was foreclosed
upon) which is not accompanied by cash proceeds. In this regard, the
modification of a debt can result in taxable gain equal to the difference
between the holder's basis in the debt and the principal amount of the modified
debt. Tax Counsel has opined that the Mortgage Notes were not modified in the
hands of the Operating Partnership. Based on the foregoing, Crescent Equities
may have less cash available for distribution in a particular year than is
necessary to meet its annual 95% distribution requirement or to avoid tax with
respect to capital gain or the excise tax imposed on certain undistributed
income for such year. To meet the 95% distribution requirement necessary to
qualify as a REIT or to avoid tax with respect to capital gain or the excise tax
imposed on certain undistributed income, Crescent Equities may find it
appropriate to arrange for borrowings through the Operating Partnership or to
pay distributions in the form of taxable stock dividends.
Under certain circumstances, Crescent Equities may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in Crescent
Equities' deduction for dividends paid for the earlier year. Thus, Crescent
Equities may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Crescent Equities will be required to pay interest based
upon the amount of any deduction taken for deficiency dividends.
Ownership Information. Pursuant to applicable Treasury Regulations, in
order to be treated as a REIT, Crescent Equities must maintain certain records
and request certain information from its shareholders designed to disclose the
actual ownership of its Equity Securities. Crescent Equities believes that it
has complied and intends to continue to comply with such requirements.
Failure to Qualify. If Crescent Equities fails to qualify as a REIT in any
taxable year and the relief provisions do not apply, Crescent Equities will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which Crescent Equities fails to qualify as a REIT will not be deductible by
Crescent Equities; nor will they be required to be made. If Crescent Equities
fails to qualify as a REIT, then, to the extent of Crescent Equities' current
and accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, Crescent Equities
will also be disqualified from electing to be treated as a REIT for the four
taxable years following the year during which it ceased to qualify as a REIT. It
is not possible to state whether in all circumstances Crescent Equities would be
entitled to such statutory relief.
Possible Legislation. On October 6, 1995, the House of Representatives
passed budget reconciliation legislation entitled the Tax Simplification Act of
1995, which contained various amendments to the Code, including amendments to
the provisions governing the tax treatment of REITs. The modifications to the
REIT rules were sponsored by the REIT industry and would generally have operated
to liberalize the requirements for qualification as a REIT. These modifications
would have become effective in the first taxable year following their enactment.
However, these modifications were not part of the budget reconciliation
legislation which passed Congress and which, in any event, President Clinton
subsequently vetoed. It is anticipated that these modifications will be
reintroduced in 1997. Whether or when modifications to the REIT rules will
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ultimately be enacted, or what provisions they will contain if they are enacted,
cannot be ascertained at this time.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as Crescent Equities qualifies as a REIT, distributions made to
Crescent Equities' taxable U.S. shareholders out of Crescent Equities' current
or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by such U.S. shareholders as ordinary
income and, for corporate shareholders, will not be eligible for the dividends
received deduction. Distributions that are properly designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed Crescent Equities' actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held its Common Shares.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Distributions in excess of current
and accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a shareholder's Common Shares, such distributions
will be included in income as long-term capital gain (or short-term capital gain
if the shares have been held for one year or less) assuming the shares are a
capital asset in the hands of the shareholder. In addition, any distribution
declared by Crescent Equities in October, November or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by Crescent Equities and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by
Crescent Equities during January of the following calendar year. Shareholders
may not include any net operating losses or capital losses of Crescent Equities
in their respective income tax returns.
In general, any loss upon a sale or exchange of shares by a shareholder who
has held such shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss to the extent of
distributions from Crescent Equities required to be treated by such shareholder
as long-term capital gain.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Most tax-exempt employees' pension trusts are not subject to federal income
tax except to the extent of their receipt of "unrelated business taxable income"
as defined in Section 512(a) of the Code ("UBTI"). Distributions by the Company
to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-exempt entity has not financed the acquisition of its
Common Shares with "acquisition indebtedness" within the meaning of the Code and
the Common Shares is not otherwise used in an unrelated trade or business of the
tax-exempt entity. In addition, certain pension trusts that own more than 10% of
a "pension-held REIT" must report a portion of the dividends that they receive
from such a REIT as UBTI. The Company has not been and does not expect to be
treated as a pension-held REIT for purposes of this rule.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. Prospective
Non-U.S. Shareholders should consult with their own tax advisors to determine
the impact of federal, state and local tax laws with regard to an investment in
Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges by
Crescent Equities of United States real property interests and not designated by
Crescent Equities as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current and accumulated
earnings and profits of Crescent Equities. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces or eliminates that tax.
Crescent Equities expects to withhold U.S. income tax at the rate of 30% on the
gross amount of any such distribution
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made to a Non-U.S. Shareholder unless (i) a lower treaty rate applies and the
Non-U.S. Shareholder has filed the required IRS Form 1001 with Crescent Equities
or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with Crescent Equities
claiming that the distribution is effectively connected with the Non-U.S.
Shareholder's conduct of a U.S. trade or business. Distributions in excess of
Crescent Equities' current and accumulated earnings and profits will be subject
to a 10% withholding requirement but will not be taxable to a shareholder to the
extent that such distributions do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. Shareholder's
shares, such distributions will give rise to tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on any gain from the sale or
disposition of the Common Shares, as described below. If it cannot be determined
at the time a distribution is made whether or not such distribution will be in
excess of current and accumulated earnings and profits, the distributions would
be subject to withholding at the same rate as dividends. However, a Non-U.S.
Shareholder may seek a refund from the IRS of amounts of tax withheld in excess
of the Non-U.S. Shareholder's actual U.S. tax liability.
For any year in which Crescent Equities qualifies as a REIT, distributions
that are attributable to gain from sales or exchanges by Crescent Equities of
United States real property interests will be taxed to a Non-U.S. Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, distributions attributable to gain from
sales of United States real property interests are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
business. Non-U.S. Shareholders would thus be taxed at the normal capital gain
rates applicable to U.S. shareholders (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate shareholder not entitled
to treaty exemption. Crescent Equities is required to withhold 35% of any
distribution that could be designated by Crescent Equities as a capital gain
dividend. This amount is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if Crescent Equities is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by foreign persons. Crescent Equities is and currently expects to
continue to be a "domestically controlled REIT," and in such case the sale of
Common Shares would not be subject to taxation under FIRPTA. However, gain not
subject to FIRPTA nonetheless will be taxable to a Non-U.S. Shareholder if (i)
investment in the Common Shares is treated as effectively connected with the
Non-U.S. Shareholder's U.S. trade or business, in which case the Non-U.S.
Shareholder will be subject to the same treatment as U.S. shareholders with
respect to such gain or (ii) the Non-U.S. Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year and either the individual has a "tax home" in the United States or
the gain is attributable to an office or other fixed place of business
maintained by the individual in the United States, in which case gains will be
subject to a 30% tax. If the gain on the sale of Common Shares were to be
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
the same treatment as U.S. shareholders with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals), and the purchaser of the Common Shares
would be required to withhold and remit to the IRS 10% of the purchase price.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE SUBSIDIARY PARTNERSHIPS
The following discussion summarizes certain federal income tax
considerations applicable solely to Crescent Equities' investment in the
Operating Partnership and its subsidiary partnerships and represents the views
of Tax Counsel. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification of the Operating Partnership and its Subsidiary Partnerships
for Tax Purposes. In the opinion of Tax Counsel, based on the provisions of the
Operating Partnership Agreement and the partnership
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agreements of the various subsidiary partnerships, certain factual assumptions
and certain representations described in the opinion, the Operating Partnership
and the subsidiary partnerships will each be treated as a partnership and
neither an association taxable as a corporation for federal income tax purposes,
nor a "publicly traded partnership" taxable as a corporation. Unlike a ruling
from the IRS, however, an opinion of counsel is not binding on the IRS or the
courts, and no assurance can be given that the IRS will not challenge the status
of the Operating Partnership and its subsidiary partnerships as partnerships for
federal income tax purposes. If for any reason the Operating Partnership were
taxable as a corporation rather than as a partnership for federal income tax
purposes, Crescent Equities would fail to qualify as a REIT because it would not
be able to satisfy the income and asset requirements. See "-- Taxation of
Crescent Equities," above. In addition, any change in the Operating
Partnership's status for tax purposes might be treated as a taxable event, in
which case Crescent Equities might incur a tax liability without any related
cash distributions. See "-- Taxation of Crescent Equities," above. Further,
items of income and deduction for the Operating Partnership would not pass
through to the respective partners, and the partners would be treated as
shareholders for tax purposes. The Operating Partnership would be required to
pay income tax at regular corporate tax rates on its net income, and
distributions to partners would constitute dividends that would not be
deductible in computing the Operating Partnership's taxable income. Similarly,
if any of the subsidiary partnerships were taxable as a corporation rather than
as a partnership for federal income tax purposes, such treatment might cause
Crescent Equities to fail to qualify as a REIT, and in any event such
partnership's items of income and deduction would not pass through to its
partners, and its net income would be subject to income tax at regular corporate
rates.
Income Taxation of the Operating Partnership and its Subsidiary
Partnerships. A partnership is not a taxable entity for federal income tax
purposes. Rather, Crescent Equities will be required to take into account its
allocable share of the Operating Partnership's income, gains, losses, deductions
and credits for any taxable year of such Partnership ending within or with the
taxable year of Crescent Equities, without regard to whether Crescent Equities
has received or will receive any cash distributions. The Operating Partnership's
income, gains, losses, deductions and credits for any taxable year will include
its allocable share of such items from its subsidiary partnerships.
Tax Allocations with Respect to Pre-Contribution Gain. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated for federal income tax purposes in a manner such
that the contributor is charged with the unrealized gain associated with the
property at the time of the contribution. The amount of such unrealized gain is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (the "Book-Tax Difference"). In
general, the fair market value of the properties initially contributed to the
Operating Partnership were substantially in excess of their adjusted tax bases.
The Operating Partnership Agreement requires that allocations attributable to
each item of initially contributed property be made so as to allocate the tax
depreciation available with respect to such property first to the partners other
than the partner that contributed the property, to the extent of, and in
proportion to, such partners' share of book depreciation, and then, if any tax
depreciation remains, to the partner that contributed the property. Accordingly,
the depreciation deductions allocable will not correspond exactly to the
percentage interests of the partners. Upon the disposition of any item of
initially contributed property, any gain attributable to an excess at such time
of basis for book purposes over basis for tax purposes will be allocated for tax
purposes to the contributing partner and, in addition, the Operating Partnership
Agreement provides that any remaining gain will be allocated for tax purposes to
the contributing partners to the extent that tax depreciation previously
allocated to the noncontributing partners was less than the book depreciation
allocated to them. These allocations are intended to be consistent with Section
704(c) of the Code and with Treasury Regulations thereunder. The tax treatment
of properties contributed to the Operating Partnership subsequent to its
formation is expected generally to be consistent with the foregoing.
In general, the contributing partners will be allocated lower amounts of
depreciation deductions for tax purposes and increased taxable income and gain
on sale by the Operating Partnership of one or more of the contributed
properties. These tax allocations will tend to reduce or eliminate the Book-Tax
Difference over the life of the Operating Partnership. However, the special
allocation rules of Section 704(c) of the Code do not
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always entirely rectify the Book-Tax Difference on an annual basis. Thus, the
carryover basis of the contributed assets in the hands of the Operating
Partnership will cause Crescent Equities to be allocated lower depreciation and
other deductions. This may cause Crescent Equities to recognize taxable income
in excess of cash proceeds, which might adversely affect Crescent Equities'
ability to comply with the REIT distribution requirements. See "-- Taxation of
Crescent Equities," above.
SALE OF PROPERTY
Generally, any gain realized by the Operating Partnership on the sale of
real property, if the property is held for more than one year, will be long-term
capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture.
Crescent Equities' share of any gain realized on the sale of any property
held by the Operating Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Operating Partnership's
business, however, will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. See "-- Taxation of Crescent Equities," above.
Such prohibited transaction income will also have an adverse effect upon
Crescent Equities' ability to satisfy the income tests for status as a REIT for
federal income tax purposes. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of the
Operating Partnership's business is a question of fact that depends on all the
facts and circumstances with respect to the particular transaction. The
Operating Partnership intends to hold its properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning and operating the properties, and to make such occasional sales of
properties as are consistent with these investment objectives.
TAXATION OF THE RESIDENTIAL DEVELOPMENT CORPORATIONS
A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the Residential Development Corporations through
dividends on non-voting stock thereof held by the Operating Partnership and
interest on the Residential Development Property Mortgages held by the Operating
Partnership. The Residential Development Corporations do not qualify as REITs
and pay federal, state and local income taxes on their taxable incomes at normal
corporate rates, which taxes reduce the cash available for distribution by
Crescent Equities to its shareholders. Crescent Equities anticipates that,
initially, deductions for interest and amortization will largely offset the
otherwise taxable income of the Residential Development Corporations, but there
can be no assurance that this will be the case or that the IRS will not
challenge such deductions. Any federal, state or local income taxes that the
Residential Development Corporations are required to pay will reduce the cash
available for distribution by Crescent Equities to its shareholders.
STATE AND LOCAL TAXES
Crescent Equities and its shareholders may be subject to state and local
tax in various states and localities, including those states and localities in
which it or they transact business, own property, or reside. The tax treatment
of Crescent Equities and the shareholders in such jurisdictions may differ from
the federal income tax treatment described above. Consequently, prospective
shareholders should consult their own tax advisors regarding the effect of state
and local tax laws upon an investment in the Common Shares of Crescent Equities.
In particular, the State of Texas imposes a franchise tax upon corporations
that do business in Texas. The Texas franchise tax is imposed on each such
entity with respect to the entity's "net taxable capital" and its "net taxable
earned surplus" (generally, the entity's federal taxable income, with certain
adjustments). The franchise tax on net taxable capital is imposed at the rate of
0.25% of an entity's net taxable capital. The franchise tax rate on "net taxable
earned surplus" is 4.5%. The Texas franchise tax is generally equal to the
greater of the tax on "net taxable capital" and the tax on "net taxable earned
surplus." The Texas franchise tax is not applied on a consolidated group basis.
Any Texas franchise tax that Crescent Equities is indirectly required to pay
will reduce the cash available for distribution by Crescent Equities to
shareholders. Even if an
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<PAGE> 47
entity is doing business in Texas for Texas franchise tax purposes, the entity
is subject to the Texas franchise tax only on the portion of the taxable capital
or taxable earned surplus apportioned to Texas.
As a Texas real estate investment trust, Crescent Equities will not be
subject directly to the Texas franchise tax. However, Crescent Equities will be
subject indirectly to the Texas franchise tax as a result of its interests in
CREE Ltd., Management I, Management II, Management III, Management IV and
Management V, which will be subject to the Texas franchise tax because they are
general partners of the Operating Partnership, Funding I, Funding II, Funding
III, Funding IV and Funding V, and the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV and Funding V will be doing business in Texas.
It is anticipated that the Crescent Equities' Texas franchise tax liability
will not be substantial because CREE Ltd., Management I, Management II,
Management III, Management IV and Management V are allocated only a small
portion of the taxable income of the Operating Partnership, Funding I, Funding
II, Funding III, Funding IV and Funding V.
The Operating Partnership, Funding I, Funding II, Funding III, Funding IV
and Funding V will not be subject to the Texas franchise tax, under the laws in
existence at the time of this Prospectus because they are partnerships instead
of corporations. There is no assurance, however, that the Texas legislature,
which will meet again in regular session in 1997, will not expand the scope of
the Texas franchise tax to apply to limited partnerships such as the Operating
Partnership, Funding I, Funding II, Funding III, Funding IV and Funding V or
enact other legislation which may result in subjecting Crescent Equities to the
Texas franchise tax. Any statutory change by the Texas legislature may be
applied retroactively.
In addition, it should be noted that two of the Residential Development
Corporations will be doing business in Texas and will be subject to the Texas
franchise tax. Further, Crescent/301, L.L.C. will be subject to the Texas
franchise tax because it is doing business in Texas and limited liability
companies are subject to Texas franchise tax. However, this franchise tax should
not be substantial because Crescent/301, L.L.C. owns a 1% interest in 301
Congress Avenue, L.P. Other entities that will be subject to the Texas franchise
tax include CresTex Development, LLC and its member CresCal Properties, Inc. It
is expected that the franchise tax liability of these two entities will not be
substantial.
Governor George W. Bush of Texas has announced his desire that the Texas
legislature consider in its 1997 regular session proposals for property tax
relief in Texas. Such relief would require increasing the proportion of
education funding costs paid by the State of Texas and reducing the proportion
paid by local property taxes. Alternatives for increasing State of Texas
revenues that have been considered include broadening the franchise tax base to
include other entities, enactment of a new gross receipts tax, enactment of a
new business activity tax and/or an increase in the sales tax. If the franchise
tax is broadened, it could be expanded to apply to partnerships such as the
Operating Partnership, Funding I, Funding II, Funding III, Funding IV and
Funding V (and possibly to business trusts such as Crescent Equities). If either
a gross receipts tax or a business activity tax was enacted, it most likely
would replace the current franchise tax. However, a gross receipts tax or a
business activities tax could apply to partnerships such as the Operating
Partnership, Funding I, Funding II, Funding III, Funding IV and Funding V (and
possibly to business trusts such as Crescent Equities). Whether or when any of
these provisions, or any alternative provisions, will ultimately be enacted, or
what provisions they will contain if they are enacted, cannot be ascertained at
this time.
Locke Purnell Rain Harrell (A Professional Corporation), special tax
counsel to Crescent Equities ("Special Tax Counsel"), has reviewed the
discussion in this section with respect to Texas franchise tax matters and is of
the opinion that, based on the current structure of Crescent Equities and based
upon current law, it accurately summarizes the Texas franchise tax matters
expressly described herein. Special Tax Counsel expresses no opinion on any
other tax considerations affecting Crescent Equities or a holder of Common
Shares, including, but not limited to, other Texas franchise tax matters not
specifically discussed above.
Tax Counsel has not reviewed the discussion in this section with respect to
Texas franchise tax matters and has expressed no opinion with respect thereto.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of Section 4975 of the Code that may be
relevant to prospective investors. This discussion does not purport to deal with
all aspects of ERISA or the Code that may be relevant to particular investors in
light of their particular circumstances. A PROSPECTIVE INVESTOR THAT IS AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA, A TAX QUALIFIED RETIREMENT PLAN, AN IRA
OR A GOVERNMENTAL, CHURCH OR OTHER PLAN THAT IS EXEMPT FROM ERISA IS URGED TO
CONSULT ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING
UNDER APPLICABLE PROVISIONS OF ERISA, THE CODE AND STATE LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP, OR SALE OF THE SECURITIES BY SUCH PLAN OR IRA.
FIDUCIARY DUTIES AND PROHIBITED TRANSACTIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to ERISA (an "ERISA Plan") should consider the fiduciary
standards under ERISA in the context of the ERISA Plan's particular
circumstances before authorizing an investment of any portion of the ERISA
Plan's assets in the Common Shares. Accordingly, such fiduciary should consider
(i) whether the investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA; (ii) whether the investment is in accordance with the
documents and instruments governing the ERISA Plan as required by Section
404(a)(1)(D) of ERISA; (iii) whether the investment is prudent under Section
404(a)(1)(B) of ERISA; and (iv) whether the investment is solely in the
interests of the ERISA Plan participants and beneficiaries and for the exclusive
purpose of providing benefits to the ERISA Plan participants and beneficiaries
and defraying reasonable administrative expenses of the ERISA Plan as required
by Section 404(a)(1)(A) of ERISA.
In addition to the imposition of fiduciary standards, ERISA and Section
4975 of the Code prohibit a wide range of transactions between an ERISA Plan, an
IRA or certain other plans (collectively, a "Plan") and persons who have certain
specified relationships to the Plan ("parties in interest" within the meaning of
ERISA and "disqualified persons" within the meaning of the Code). Thus, a Plan
fiduciary or person making an investment decision for a Plan also should
consider whether the acquisition or the continued holding of the Common Shares
might constitute or give rise to a direct or indirect prohibited transaction.
PLAN ASSETS
The prohibited transactions rules of ERISA and the Code apply to
transactions with a Plan and also to transactions with the "plan assets" of a
Plan. The "plan assets" of a Plan include the Plan's interest in an entity in
which the Plan invests and, in certain circumstances, the assets of the entity
in which the Plan holds such interest. The term "plan assets" is not
specifically defined in ERISA or the Code, nor, as of the date hereof, has it
been interpreted definitively by the courts in litigation. On November 13, 1986,
the United States Department of Labor, the governmental agency primarily
responsible for administering ERISA, adopted a final regulation (the "DOL
Regulation") setting out the standards it will apply in determining whether an
equity investment in an entity will cause the assets of such entity to
constitute "plan assets." The DOL Regulation applies for purposes of both ERISA
and Section 4975 of the Code.
Under the DOL Regulation, if a Plan acquires an equity interest in an
entity, which equity interest is not a "publicly-offered security," the Plan's
assets generally would include both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulation defines a publicly-offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under Section 12(b) or 12(g) of the Exchange Act,
or sold pursuant to an effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act within 120 days
after the end of the fiscal year of the issuer during which the offering
occurred). The Common Shares will be sold in an offering registered under the
Securities Act and registered under Section 12(b) of the Exchange Act.
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The DOL Regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a class of securities will not fail
to be "widely held" solely because the number of independent investors falls
below 100 subsequent to the initial public offering as a result of events beyond
the issuer's control. The Company expects the Common Shares to be "widely held"
upon completion of any offering.
The DOL Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The DOL Regulation further provides that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as will be the case with any offering, certain restrictions ordinarily
will not affect, alone or in combination, the finding that such securities are
freely transferable. The Company believes that the restrictions imposed under
the Declaration of Trust on the transfer of the Common Shares are limited to
restrictions on transfer generally permitted under the DOL Regulation and are
not likely to result in the failure of the Common Shares to be "freely
transferable." See "Description of the Shares of the Company -- Ownership Limits
and Restrictions on Transfer." The DOL Regulation only establishes a presumption
in favor of a finding of free transferability and, therefore, no assurance can
be given that the Department of Labor and the U.S. Treasury Department would not
reach a contrary conclusion with respect to the Common Shares. Any additional
transfer restrictions imposed on the transfer of the Common Shares will be
discussed in the applicable Prospectus Supplement.
Assuming that the Common Shares will be "widely held" and "freely
transferable," the Company believes that the Common Shares will be
publicly-offered securities for purposes of the DOL Regulation and that the
assets of the Company will not be deemed to be "plan assets" of any plan that
invests in the Common Shares.
PLAN OF DISTRIBUTION
This Prospectus relates to (i) the possible issuance by the Company of
Original Exchange Shares if, and to the extent that, holders of Original Units
tender such Original Units in exchange for Common Shares, (ii) the offer and
sale from time to time of the Original Shares by the holders thereof, (iii) the
possible distribution of 617,392 Original Shares if, and to the extent that, the
holder thereof (which is a limited partnership) distributes such Original Shares
pro rata to its partners as part of the liquidation and winding up of affairs of
such holder, (iv) the possible issuance by the Company of up to 1,097,014 RER
Exchange Shares, if, and to the extent that, the holder of the RER Units tenders
such RER Units in exchange for Common Shares, (v) the possible issuance by the
Company of up to 9,522 JME Exchange Shares if, and to the extent that, the
holder of up to 9,522 JME Units tenders such JME Units in exchange for Common
Shares, and (vi) the offer and sale or other distribution from time to time of
any Secondary Shares by Selling Shareholders. The Company has registered the
Original Shares and the Exchange Shares for sale to provide the Selling
Shareholders with freely tradable securities, but registration of such shares
does not necessarily mean that any of such shares will be offered or sold by the
Selling Shareholders.
The Company will not receive any proceeds from the offering by the Selling
Shareholders or from the issuance of the Exchange Shares to holders of Original
Units upon receiving a notice of exchange (but it may acquire from such holders
the Units tendered for exchange). The Selling Shareholders may from time to time
sell all or a portion of the Secondary Shares on the NYSE, in the
over-the-counter market, on any other national securities exchange on which the
Common Shares is listed or traded, in negotiated transactions or otherwise, at
prices then prevailing or related to the then current market price or at
negotiated prices. The Secondary Shares may be sold directly or through brokers
or dealers, or in a distribution by one or more underwriters on a firm
commitment or best efforts basis. The methods by which the Secondary Shares may
be sold or distributed include, without limitation, (i) a block trade (which may
involve crosses) in which the broker or dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction, (ii) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to this
Prospectus, (iii) exchange distributions and/or secondary distributions in
accordance with the rules of the NYSE, (iv) ordinary brokerage transactions and
transactions in which the broker solicits purchasers, (v) pro rata distributions
as part of the liquidation and
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winding up of the affairs of the holders thereof, and (vi) privately negotiated
transactions. The Selling Shareholders may from time to time deliver all or a
portion of the Secondary Shares to cover a short sale or sales or upon the
exercise, settlement or closing of a call equivalent position or a put
equivalent position. The Selling Shareholders and any broker-dealers
participating in the distribution of the Secondary Shares may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of the Secondary Shares by the Selling Shareholders and any commissions
received by any such broker-dealers may be deemed to be underwriting commissions
under the Securities Act. The Selling by any such broker-dealers may be deemed
to be underwriting commissions under the Securities Act. The Selling
Shareholders may sell all or any portion of the Secondary Shares in reliance
upon Rule 144 under the Securities Act.
At a time a particular offer of Secondary Shares is made, a Prospectus
Supplement, if required, will be distributed that will set forth the name of any
dealers or agents and any commissions and other terms constituting compensation
from the Selling Shareholders and any other required information. The Secondary
Shares may be sold from time to time at varying prices determined at the time of
sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Secondary Shares may in such circumstances be sold only through
registered or licensed brokers or dealers. In addition, in certain states, the
Secondary Shares may not be sold unless they have been registered or qualified
for sale in such state or an exemption from such registration or qualification
requirement is available and is complied with.
The Company may from time to time issue up to Exchange Shares upon
the acquisition of the Units tendered for exchange. The Company will acquire the
exchanging partner's Unit in exchange for each Exchange Share that the Company
issues in connection with these acquisitions. Consequently, with each exchange,
the Company's interest in the Operating Partnership will increase.
EXPERTS
The financial statements and schedule incorporated in this Prospectus by
reference to the Predecessor Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995, as amended, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing. The report of Arthur Andersen LLP with
respect to the combined financial statements and schedules of the Rainwater
Property Group (as defined in the financial statements and schedule incorporated
by reference herein) is based in part on the report of KPMG Peat Marwick LLP,
independent public accountants, on the combined statement of operations, owners'
deficit, and cash flows of The Crescent property and in reliance upon the
authority of KPMG Peat Marwick LLP as experts in accounting and auditing.
The financial statements incorporated in this Prospectus by reference to
the Predecessor Corporation's Current Reports on Form 8-K (i) dated August 2,
1994 and filed on January 9, 1996, as amended on February 2, 1996 and February
15, 1996, (ii) dated October 3, 1994 and filed on January 9, 1996, as amended on
February 2, 1996 and February 15, 1996, and (iii) dated April 18, 1996 and filed
on June 5, 1996, and (iv) dated August 15, 1996 and filed on September 11, 1996,
as amended on September 27, 1996 and November 12, 1996 respectively, relating to
the Caltex House, Regency Plaza One, Two Renaissance Square, Waterside Commons,
Stanford Corporate Centre, MCI Tower, Denver Marriott City Center, Ptarmigan
Place, Albuquerque Facility, the Hyatt Regency Albuquerque, and 301 Congress and
Greenway Plaza properties and for East West Properties, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports, except that certain
financial statements incorporated herein by reference to the Predecessor
Corporation's Current Report on Form 8-K, dated August 15, 1996 and filed on
September 11, 1996, as amended on September 27, 1996 and November 12, 1996,
relating to Greenway Plaza have been audited by Grant Thornton LLP, independent
certified public accountants, as indicated in their report with respect thereto,
and are included herein in reliance upon the authority of Grant Thornton LLP as
experts in accounting and auditing in giving said reports. The financial
statements incorporated in this Prospectus by reference to the Predecessor
Corporation's Current Report on Form 8-K
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<PAGE> 51
dated October 3, 1994 and filed on January 9, 1996, as amended on February 2,
1996 and February 15, 1996, relating to Spectrum Center have been audited by
Huselton & Morgan, P.C., independent public accountants, as indicated in its
report with respect thereto, and are included herein in reliance upon their
authority as experts in accounting and auditing.
LEGAL MATTERS
The legality of the issuance of the Common Shares will be passed upon for
the Company by Shaw, Pittman, Potts & Trowbridge, Washington, D.C. Certain legal
matters relating to federal income tax considerations will be passed upon for
the Company by Shaw, Pittman, Potts & Trowbridge, which will rely, as to all
Texas franchise tax matters upon the opinion of Locke Purnell Rain Harrell (A
Professional Corporation), Dallas, Texas.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports and other information with the
Commission. Such reports, proxy statements and other information can be
inspected at the Public Reference Section maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and
the following regional offices of the Commission: Citicorp Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661-2511 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, the Company's Common Shares are
listed on the New York Stock Exchange and such reports, proxy statements and
other information concerning the Company can be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement"), of which this Prospectus is a part, under
the Securities Act, with respect to the Common Shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contract or other documents are not necessarily complete,
and in each instance, reference is made to the copy of such contract or
documents filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Common Shares,
reference is hereby made to the Registration Statement and such exhibits and
schedules which may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the fees prescribed by the Commission.
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON SHARES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Incorporation of Certain Documents by
Reference........................... 2
The Company........................... 4
Securities to be Offered.............. 6
Risk Factors.......................... 6
Description of Shares of the
Company............................. 10
Certain Provisions of the Declaration
of Trust, Bylaws and Texas Law...... 13
Description of Units.................. 16
Registration Rights................... 19
Selling Shareholders.................. 20
Exchange of Units..................... 23
Federal Income Tax Considerations..... 33
ERISA Considerations.................. 46
Plan of Distribution.................. 47
Experts............................... 48
Legal Matters......................... 49
Available Information................. 49
</TABLE>
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9,598,216 SHARES
CRESCENT
REAL ESTATE EQUITIES TRUST
COMMON SHARES
------------------------
PROSPECTUS
------------------------
, 1997
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<PAGE> 53
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Declaration of Trust provides that the liability of each
trust manager for monetary damages shall be eliminated to the fullest extent
permitted by applicable law. In general, under current Texas law, a trust
manager is liable to the trust only for liabilities arising from such trust
manager's own willful misfeasance or willful malfeasance or gross negligence.
The Declaration of Trust also provides that no amendment thereto may limit or
eliminate this limitation of liability with respect to events occurring prior to
the effective date of such amendment.
The Company's Declaration of Trust provides that the trust managers and
officers shall be indemnified to the maximum extent permitted by Texas law.
Under current Texas law, the trust will indemnify a person who was, is, or is
threatened to be made a named defendant or respondent in a proceeding because
the person is or was a trust manager or officer if it is determined that the
person (i) conducted himself in good faith; (ii) reasonably believed: (a) in the
case of conduct in his official capacity as a trust manager or officer of the
real estate investment trust, that his conduct was in the real estate investment
trust's best interests; and (b) in all other cases, that his conduct was at
least not opposed to the real estate investment trust's best interests; and
(iii) in the case of any criminal proceeding, had no reasonable cause to believe
that his conduct was unlawful. Except to the extent provided in the following
sentence, a trust manager or officer may not be indemnified (i) in respect of a
proceeding in which the person is found liable on the basis that personal
benefit was improperly received by him, whether or not the benefit resulted from
an action taken in the person's official capacity; or (ii) in which the person
is found liable to the real estate investment trust. Notwithstanding the
foregoing, a person may be indemnified against judgments, penalties (including
excise and similar taxes), fines, settlements, and reasonable expenses actually
incurred by the person in connection with the proceeding; provided that if the
person is found liable to the real estate investment trust or is found liable on
the basis that personal benefit was improperly received by the person, the
indemnification (i) is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and (ii) shall not be made in respect
of any proceeding in which the person shall have been found liable for willful
or intentional misconduct in the performance of his duty to the real estate
investment trust. In addition, the Company's Declaration of Trust and Bylaws
require it to pay or reimburse, in advance of the final disposition of a
proceeding, reasonable expenses incurred by a present or former director or
officer made a party to a proceeding by reason of his status as a trust manager
or officer, provided that the Company shall have received (i) a written
affirmation by the trust manager or officer of his good faith belief that he has
met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (ii) a written undertaking by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met. The Company's Declaration
of Trust and Bylaws also permit the Company to provide indemnification, payment
or reimbursement of expenses to any employee or agent of the Company in such
capacity. Any indemnification, payment or reimbursement of the expenses
permitted by the Declaration of Trust and Bylaws shall be furnished in
accordance with the procedures provided for indemnification and payment or
reimbursement of expenses under Texas Real Estate Investment Trust Act for trust
managers.
The Operating Partnership Agreement contains indemnification provisions
comparable to those contained in the Declaration of Trust.
The Company carries insurance that purports to insure officers and trust
managers of the Company against certain liabilities incurred by them in the
discharge of their official functions.
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<PAGE> 54
ITEM 16. EXHIBITS.
The following is a list of all exhibits filed as a part of this
Registration Statement on Form S-3, including those incorporated herein by
reference.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
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<S> <C>
4.01 -- Declaration of Trust of Crescent Real Estate Equities Trust (previously filed).
4.02 -- Bylaws of Crescent Real Estate Equities Trust (previously filed).
*4.03 -- Second Amended and Restated Agreement of Limited Partnership of Crescent Real
Estate Equities Limited Partnership.
4.04 -- Form of Stock Certificate (previously filed).
4.05 -- Registration Rights, Lock-Up and Pledge Agreement dated as of May 5, 1994 (filed
herewith).
*5.01 -- Opinion of Shaw, Pittman, Potts & Trowbridge as to the legality of the securities
being registered by Crescent Real Estate Equities Trust.
*8.01 -- Opinion of Shaw, Pittman, Potts & Trowbridge regarding certain material tax
issues relating to Crescent Real Estate Equities Trust.
*8.02 -- Opinion of Locke Purnell Rain Harrell (A Professional Corporation).
23.01 -- Consent of Arthur Andersen LLP, Certified Public Accountants, dated January 3,
1997 (filed herewith).
23.02 -- Consent of KPMG Peat Marwick LLP, Certified Public Accountants, dated January 3,
1997 (filed herewith).
23.03 -- Consent of Huselton & Morgan, P.C., A Professional Corporation, Certified Public
Accountants, dated January 6, 1997 (filed herewith).
23.04 -- Consent of Grant Thornton LLP, Certified Public Accountants, dated January 6,
1997 (filed herewith).
*23.05 -- Consent of Shaw, Pittman, Potts & Trowbridge.
*23.06 -- Consent of Locke Purnell Rain Harrell (A Professional Corporation).
24.01 -- Powers of Attorney (previously filed).
</TABLE>
- ---------------
* To be filed by amendment or incorporated by reference.
II-2
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Worth, State of Texas, on the 13th day of
January, 1997.
CRESCENT REAL ESTATE EQUITIES, INC.
By: /s/ GERALD W. HADDOCK
--------------------------------------
GERALD W. HADDOCK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------------- ---------------------------------- -----------------
<C> <S> <C>
/s/ RICHARD E. RAINWATER* Trust Manager and Chairman of the January 13, 1997
- ---------------------------------------- Board
RICHARD E. RAINWATER
/s/ JOHN C. GOFF* Trust Manager and Vice Chairman of January 13, 1997
- ---------------------------------------- the Board
JOHN C. GOFF
/s/ GERALD W. HADDOCK Trust Manager, President and Chief January 13, 1997
- ---------------------------------------- Executive Officer (Principal
GERALD W. HADDOCK Executive Officer)
/s/ DALLAS E. LUCAS Senior Vice President and Chief January 13, 1997
- ---------------------------------------- Financial Officer (Principal
DALLAS E. LUCAS Financial and Accounting
Officer)
/s/ ANTHONY M. FRANK* Trust Manager January 13, 1997
- ----------------------------------------
ANTHONY M. FRANK
/s/ MORTON H. MEYERSON* Trust Manager January 13, 1997
- ----------------------------------------
MORTON H. MEYERSON
/s/ WILLIAM F. QUINN* Trust Manager January 13, 1997
- ----------------------------------------
WILLIAM F. QUINN
/s/ PAUL E. ROWSEY* Trust Manager January 13, 1997
- ----------------------------------------
PAUL E. ROWSEY, III
Trust Manager
- ----------------------------------------
MELVIN ZUCKERMAN
</TABLE>
*By: /s/ GERALD W. HADDOCK
---------------------------------
GERALD W. HADDOCK
ATTORNEY-IN-FACT
II-3
<PAGE> 1
Exhibit 4.05
REGISTRATION RIGHTS, LOCK-UP AND PLEDGE AGREEMENT
This Registration Rights, Lock-Up and Pledge Agreement (the
"Agreement") is entered into as of May 5, 1994 by and between Crescent Real
Estate Equities, Inc., a Maryland corporation (the "Company"), Crescent Real
Estate Equities Limited Partnership (the "Operating Partnership") and certain
stockholders of the Company (the "Holders") who have executed a signature page
to this Agreement and who are identified on Schedule A hereto.
WHEREAS, the Holders (as defined below) are to receive shares of common
stock of the Company, $0.01 par value ("Common Stock"), or limited partnership
interests ("Units") in the Operating Partnership issued without registration
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with the formation transactions described in the Registration
Statement on Form S-11 (File No. 33-75188), as amended, relating to the
Offering (as defined below);
WHEREAS, this Agreement is made pursuant to (i) the U.S. Purchase
Agreement dated April 28, 1994 (the "U.S. Purchase Agreement") by and among the
Company, the Operating Partnership, and Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., Dean Witter
Reynolds Inc., PaineWebber Incorporated and Prudential Securities Incorporated,
as representatives of the several underwriters named on Schedule A thereto (the
"Representatives"), and (ii) the International Purchase Agreement dated April
28, 1994 (the "International Purchase Agreement") by and among the Company, the
Operating Partnership, and Merrill Lynch International Limited, Bear, Stearns
International Limited, Dean Witter International Ltd., PaineWebber
International (U.K.) Ltd. and Prudential-Bache Securities (U.K.) Inc., as lead
managers of the several managers named on Schedule A thereto (the "Lead
Managers");
WHEREAS, in order to induce the Representatives to enter into the U.S.
Purchase Agreement and the Lead Managers to enter into the International
Purchase Agreement, the Holders have agreed to the Lock-Up set forth in Section
2 hereof and the Pledge set forth in Section 13 hereof; and
WHEREAS, in order to induce the Holders to consummate the transactions
described in the registration statement relating to the Offering the Company
has agreed to provide the Holders with the registration rights set forth in
Section 3 hereof.
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
and agreements set forth herein, and other valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
<PAGE> 2
1. Certain Definitions.
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"Common Stock" shall have the meaning set forth in the preamble hereof.
"Company" shall have the meaning set forth in the preamble hereof.
"Holders" shall have the meaning set forth in the preamble hereof.
"Merrill Lynch" means Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Offering" shall mean the sale of Common Stock in connection with the
Company's initial public offering.
"Operating Partnership" shall have the meaning set forth in the preamble
and also shall include the Operating Partnership's successors.
"Operating Partnership Agreement" shall have the meaning set forth in
Section 2(b) hereof.
"Person" shall mean an individual, partnership, corporation, trust, or
incorporated organization, or a government or agency or political subdivision
thereof.
"Prospectus" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, as amended or supplemented by
any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Shares covered by such Registration Statement, and by
all other amendments and supplements to such prospectus, including
post-effective amendments, and in each case including all material incorporated
by reference therein.
"Registrable Shares" shall mean the Shares, excluding (i) Shares for
which a Registration Statement relating to the sale thereof shall have become
effective under the Securities Act and which have been disposed of under such
Registration Statement, (ii) Shares sold pursuant to Rule 144 under the
Securities Act or (iii) Shares eligible for sale pursuant to Rule 144(k) under
the Securities Act.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance with this Agreement, including, without
limitation: (i) all SEC, stock exchange or NASD registration and filing fees;
(ii) all fees and
2
<PAGE> 3
expenses incurred in connection with compliance with state securities or "blue
sky" laws (including reasonable fees and disbursements of counsel in connection
with "blue sky" qualification of any of the Registrable Shares and the
preparation of a Blue Sky Memorandum) and compliance with the rules of the NASD;
(iii) all expenses of any Persons in preparing or assisting in preparing, word
processing, printing and distributing any Registration Statement, any
Prospectus, certificates and other documents relating to the performance of and
compliance with this Agreement; (iv) all fees and expenses incurred in
connection with the listing, if any, of any of the Registrable Shares on any
securities exchange or exchanges pursuant to Section 3(e) hereof; and (v) the
fees and disbursements of counsel for the Company and of the independent public
accountants of the Company, including the expenses of any "cold comfort" letters
required by or incident to such performance and compliance. Registration
Expenses shall specifically exclude underwriting discounts and commissions
relating to the sale or disposition of Registrable Shares by a selling Holder,
the fees and disbursements of counsel representing a selling Holder, and
transfer taxes, if any, relating to the sale or disposition of Registrable
Shares by a selling Holder, all of which shall be borne by such Holder in all
cases.
"Registration Statement" shall mean any registration statement of
the Company and any other entity required to be a registrant with respect to
such registration statement pursuant to the requirements of the Securities Act
which covers any of the Registrable Shares on an appropriate form, and all
amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all materials incorporated by reference
therein.
"SEC" shall mean the Securities and Exchange Commission.
"Shares" shall mean (i) the Common Stock issued to the Holders on
the date hereof, and (ii) any Common Stock issued or to be issued to the Holders
in exchange for the Units received by the Holders on the date hereof.
"Units" shall have the meaning set forth in the preamble hereof.
2. Lock-up Agreement.
(a) Each Holder hereby agrees that, except as set forth in Section
2(b) below, from the date hereof until one year following the closing of the
Offering (the "Lock-up Period"), without the prior written consent of Merrill
Lynch and the Company, it will not offer, pledge, sell, contract to sell, grant
any options for the sale of or otherwise transfer, distribute or dispose of,
directly or indirectly (collectively "Dispose of"), any Shares or Units (the
"Lock-up").
(b) The following dispositions of Shares and/or Units shall not be
subject to the Lock-up set forth in Section 2(a):
3
<PAGE> 4
(i) a Holder who is a natural person may Dispose of Shares or
Units to his or her spouse, siblings, parents or any natural or adopted
children or other descendants or to any personal trust in which any such
family member or such Holder retains the entire beneficial interest;
(ii) a Holder that is a corporation, partnership, joint venture
or other business entity may Dispose of Shares or Units to one or more
Persons who have an ownership interest in such Holder or to one or more
other entities that are wholly owned and controlled, legally and
beneficially, by such Holder or by one or more of the Persons who have
an ownership interest in such Holder;
(iii) a Holder may Dispose of Shares or Units on his or her
death to such Holder's estate, executor, administrator or personal
representative or to such Holder's beneficiaries pursuant to a devise
or bequest or by laws of descent and distribution; and
(iv) a Holder may Dispose of Shares or Units as a gift or other
transfer without consideration;
provided, however, that in the case of any transfer of Shares or Units pursuant
to clauses (i), (ii) and (iv), the transferor shall, at the request of the
Company, provide evidence (which may include, without limitation, an opinion of
counsel satisfactory in form, scope and substance to the Company in its sole
discretion as the issuer thereof) satisfactory to the Company that the transfer
is exempt from the registration requirements of the Securities Act and shall,
in the case of Units, comply with all provisions relating to the transfer of
Units contained in the First Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (the "Operating Partnership
Agreement").
In the event any Holder Disposes of Shares or Units described in this
Section 2(b), such Shares or Units shall remain subject to this Agreement and,
as a condition of the validity of such disposition, the transferee shall be
required to execute and deliver a counterpart of this Agreement. Thereafter,
such transferee shall be deemed to be a Holder for purposes of this Agreement.
3. Registration.
(a) Filing of Shelf Registration Statement. Subject to the conditions
set forth in this Agreement, the Company shall cause to be filed a Registration
Statement under Rule 415 under the Securities Act relating to the sale by the
Holders of all the Registrable Shares in accordance with the terms hereof, and
shall use reasonable efforts to cause such Registration Statement to be filed
with the SEC promptly after the expiration of the Lock-up Period and to be
declared
4
<PAGE> 5
effective as soon thereafter as possible. The Company agrees to use reasonable
efforts to keep the Registration Statement continuously effective until the
date on which the Holders no longer hold any Registrable Shares or Units
(hereinafter referred to as the "Shelf Registration Expiration Date").
(b) Demand Registration. Subject to the conditions set
forth in this Agreement, at any time after the Shelf Registration Expiration
Date and while any Registrable Shares are outstanding, the Company shall, at
the written request of any Holder who is unable to sell its Registrable Shares
pursuant to Rule 144(k) under the Securities Act, cause to be filed as soon as
practicable after the date of such request by such Holder a Registration
Statement under Rule 415 under the Securities Act relating to the sale by the
Holder of all of the Registrable Shares held by such Holder in accordance with
the terms hereof, and shall use reasonable efforts to cause such Registration
Statement to be declared effective by the SEC as soon as practicable
thereafter. The Company may, in its sole discretion, elect to file the
Registration Statement before receipt of notice from any Holder. The Company
agrees to use reasonable efforts to keep the Registration Statement
continuously effective thereafter until the date on which such Holder no longer
holds any Registrable Shares.
(c) Piggyback Registration. If at any time after the Shelf
Registration Expiration Date and while any Registrable Shares or Units are
outstanding (without any obligation to do so) the Company proposes to file a
registration statement under the Securities Act with respect to an offering of
Common Stock solely for cash (other than a registration statement (i) on Form
S-8 or any successor form to such Form or in connection with any employee or
director welfare, benefit or compensation plan, (ii) on Form S-4 or any
successor form to such Form or in connection with an exchange offer, (iii) in
connection with a rights offering exclusively to existing holders of Common
Stock, (iv) in connection with an offering solely to employees of the Company or
its Subsidiaries, or (v) relating to a transaction pursuant to Rule 145 of the
Securities Act or any other "business combination" transaction), whether or not
for its own account, the Company shall give prompt written notice of such
proposed filing to the Holders. The notice referred to in the preceding sentence
shall offer Holders the opportunity to register such amount of Registrable
Shares as each Holder may request (a "Piggyback Registration"). Subject to the
provisions of Section 4 below, the Company shall include in such Piggyback
Registration, in the registration and qualification for sale under the blue sky
or securities laws of the various states and in any underwriting in connection
therewith all Registrable Shares for which the Company has received written
requests for inclusion therein within fifteen (15) calendar days after the
notice referred to above has been given by the Company to the Holders. Holders
of Registrable Shares shall be permitted to withdraw all or part of the
Registrable Shares from a Piggyback Registration at any time prior to the
effective date of such Piggyback Registration. If a Piggyback Registration is an
underwritten primary registration on behalf of the Company and the managing
underwriter advises the
5
<PAGE> 6
Company that the total number of shares of Common Stock requested to be
included in such registration exceeds the number of shares of Common Stock
which can be sold in such offering, the Company will include in such
registration in the following priority: (i) first, all Common Stock the Company
proposes to sell, and (ii) second, up to the full number of applicable
Registrable Shares requested to be included in such registration by any Holders
which, in the case of clause (ii) above, in the opinion of such managing
underwriter, can be sold without adversely affecting the price range or
probability of success of such offering.
(d) The Company shall notify each Holder of the effectiveness of the
Registration Statement and shall furnish to each Holder such number of copies
of the Registration Statement (including any amendments, supplements and
exhibits), the Prospectus contained therein (including each preliminary
prospectus and all related amendments and supplements) and any documents
incorporated by reference in the Registration Statement or such other documents
as the Holder may reasonably request in order to facilitate its sale of the
Registrable Shares in the manner described in the Registration Statement.
(e) The Company shall prepare and file with the SEC from time to time
such amendments and supplements to the Registration Statement and Prospectus
used in connection therewith as may be necessary to keep the Registration
Statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Shares until the earlier of
(i) such time as all of the Registrable Shares have been disposed of in
accordance with the intended methods of disposition by the Holders as set forth
in the Registration Statement or (ii) the date on which the Registration
Statement ceases to be effective in accordance with the terms of this Section 3.
Upon five business days' notice, the Company shall file any supplement or
post-effective amendment to the Registration Statement with respect to the
plan of distribution or such Holder's ownership interests in Registrable Shares
that is reasonably necessary to permit the sale of the Holder's Registrable
Shares pursuant to the Registration Statements. The Company shall file any
necessary listing applications or amendments to the existing applications to
cause the Shares registered under any Registration Statement to be then listed
or quoted on the primary exchange or quotation system on which the Common Stock
is then listed or quoted.
(f) The Company shall promptly notify each Holder of, and confirm in
writing, any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus related thereto or for additional
information. In addition, the Company shall promptly notify each Holder of, and
confirm in writing, the filing of the Registration Statement or any Prospectus,
amendment or supplement related thereto or any post-effective amendment to the
Registration Statement and the effectiveness of any post-effective amendment.
6
<PAGE> 7
(g) At any time when a Prospectus relating to the Registration
Statement is required to be delivered under the Securities Act, the Company
shall immediately notify each Holder of the happening of any event as a result
of which the Prospectus included in the Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. In such event, the Company shall promptly prepare and furnish to
each Holder a reasonable number of copies of a supplement to or an amendment of
such Prospectus as may be necessary so that, as thereafter delivered to the
purchasers of Registrable Shares, such Prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Company will, if
necessary, amend the Registration Statement of which such Prospectus is a part
to reflect such amendment or supplement.
4. State Securities Laws. Subject to the conditions set forth in this
Agreement, the Company shall, in connection with the filing of any Registration
Statement hereunder, file such documents as may be necessary to register or
qualify the Registrable Shares under the securities or "Blue Sky" laws of such
states as any Holder may reasonably request, and the Company shall use its best
efforts to cause such filings to become effective; provided, however, that the
Company shall not be obligated to qualify as a foreign corporation to do
business under the laws of any such state in which it is not then qualified or
to file any general consent to service or process in any such state. Once
effective, the Company shall use its best efforts to keep such filings
effective until the earlier of (a) such time as all of the Registrable Shares
have been disposed of in accordance with the intended methods of disposition by
the Holder as set forth in the Registration Statement, (b) in the case of a
particular state, a Holder has notified the Company that it no longer requires
an effective filing in such state in accordance with its original request for
filing or (c) the date on which the Registration Statement ceases to be
effective. The Company shall promptly notify each Holder of, and confirm in
writing, the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Shares for sale under the
securities or "Blue Sky" laws of any jurisdiction or the initiation or threat
of any proceeding for such purpose.
5. Expenses. The Company shall bear all Registration Expenses incurred
in connection with the registration of the Registrable Shares pursuant to this
Agreement, except that each Holder shall be responsible for any brokerage or
underwriting commissions and taxes of any kind (including, without limitation,
transfer taxes) with respect to any disposition, sale or transfer of
Registrable Shares sold by it and for any legal, accounting and other expenses
incurred by it.
7
<PAGE> 8
6. Cooperation. Each of the Holders hereby agrees (a) to cooperate with
the Company and to furnish to the Company in a timely manner all such
information concerning its plan of distribution and ownership interests with
respect to its Registrable Shares and any other information as the Company may
reasonably request in connection with the preparation of the Registration
Statement and any filings with any state securities commissions and (b) to
deliver or cause delivery of the Prospectus contained in the Registration
Statement to any purchaser of the shares covered by the Registration Statement
from the Holder.
7. Suspension of Registration Requirement.
(a) The Company shall promptly notify each Holder of, and
confirm in writing, the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose. The Company shall use its best efforts to obtain
the withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible moment.
(b) Notwithstanding anything to the contrary set forth in this
Agreement, the Company's obligation under this Agreement to use its best efforts
to cause the Registration Statement and any filings with any state securities
commission to become effective or to amend or supplement the Registration
Statement shall be suspended in the event and during such period as unforeseen
circumstances exist (including without limitation (i) an underwritten primary
offering by the Company if the Company is advised by the underwriters that sale
of Registrable Shares under the Registration Statement would have a material
adverse effect on the primary offering or (ii) pending negotiations relating to,
or consummation of, a transaction or the occurrence of an event that would
require additional disclosure of material information by the Company in the
Registration Statement or such filing, as to which the Company has a bona fide
business purpose for preserving confidentiality or which renders the Company
unable to comply with SEC requirements) (such unforeseen circumstances being
hereinafter referred to as a "Suspension Event") that would make it impractical
or inadvisable to cause the Registration Statement or such filings to become
effective or to amend or supplement the Registration Statement, but such
suspension shall continue only for so long as such event or its effect is
continuing but in no event will that suspension exceed 90 days. The Company
shall notify the Holder of the existence and, in the case of circumstances
referred to in clause (i) of this Section 7(b), nature of any Suspension Event.
(c) Each holder of Registrable Shares whose Registrable Shares
are covered by a Registration Statement filed pursuant to Section 3 hereof
agrees, if requested by the Company in the case of a Company-initiated
non-underwritten offering or if requested by the managing underwriter or
underwriters in a Company-initiated underwritten offering, not to effect any
public sale or
8
<PAGE> 9
distribution of any of the securities of the Company of any class included in
such Registration Statement, including a sale pursuant to Rule 144 or Rule 144A
under the Securities Act (except as part of such Company-initiated
registration), during the 15-day period prior to, and during the 90-day period
beginning on, the date of effectiveness of each Company-initiated offering
made pursuant to such Registration Statement, to the extent timely notified in
writing by the Company or the managing underwriters; provided, however, that
such 90-day period shall be extended by the number of days from and including
the date of the giving of any notice pursuant to Section 3(f) or (g) hereof to
and including the date when each seller of Registrable Shares covered by such
Registration Statement shall have received the copies of the supplemented or
amended Prospectus contemplated by Section 3(g) hereof.
8. Black-Out Period. Following the effectiveness of the
Registration Statement and the filings with any state securities commissions,
the Holders agree that they will not effect any sales of the Registrable Shares
pursuant to the Registration Statement or any such filings at any time after
they have received notice from the Company to suspend sales as a result of the
occurrence or existence of any Suspension Event or so that the Company may
correct or update the Registration Statement or such filing. The Holder may
recommence effecting sales of the Shares pursuant to the Registration Statement
or such filings following further notice to such effect from the Company, which
notice shall be given by the Company not later than five days after the
conclusion of any such Suspension Event. If so directed by the Company, Holders
will deliver to the Company all copies of the Prospectus covering the
Registrable Shares current at the time of receipt of such notice.
9. Additional Shares. The Company, at its option, may register,
under any registration statement and any filings with any state securities
commissions filed pursuant to this Agreement, any number of unissued Common
Stock of the Company or any Common Stock of the Company owned by any other
shareholder or shareholders of the Company.
10. Indemnification.
(a) Indemnification by the Company. The Company agrees to
indemnify and hold harmless each Holder and each person, if any, who controls
any Holder within the meaning of Section 15 of the Securities Act of 1933 as
follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment
thereto) pursuant to which the Registrable Shares were
registered under the Securities Act, including all documents
9
<PAGE> 10
incorporated therein by reference, or the omission or alleged
omission therefrom of a material fact required to be stated therein
or necessary to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus (or any amendment or
supplement thereto), including all documents incorporated therein by
reference, or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission, if such settlement is effected with the written consent of
the Company; and
(iii) against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), reasonably
incurred in investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental
agency or body, commenced or threatened, in each case whether or not
a party, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under
subparagraph (i) or (ii) above;
provided, however, that the indemnity provided pursuant to this Section 10 does
not apply to any Holder with respect to any loss, liability, claim, damage or
expense to the extent arising out of (x) any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by such Holder expressly for
use in the Registration Statement (or any amendment thereto) or the Prospectus
(or any amendment or supplement thereto) or (y) such Holder's failure to
deliver an amended or supplemental Prospectus if such loss, liability, claim,
damage or expense would not have arisen had such delivery occurred.
(b) Indemnification by Holders. Each Holder severally agrees to
indemnify and hold harmless the Company and the other selling Holders, and each
of their respective directors and officers (including each director and officer
of the Company who signed the Registration Statement), and each person, if any,
who controls the Company or the other selling Holders within the meaning of
10
<PAGE> 11
Section 15 of the Securities Act, to the same extent as the indemnity contained
in Section (a) hereof (except that any settlement described in Section 3(a)(ii)
shall be effected with the written consent of such Holder), but only insofar as
such loss, liability, claim, damage or expense arises out of or is based upon
(x) any untrue statement or omission, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto) or any
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Holder
expressly for use in such Registration Statement (or any amendment thereto) or
such Prospectus (or any amendment or supplement thereto) or (y) such Holder's
failure to deliver an amended or supplemental Prospectus if such loss,
liability, claim, damage or expense would not have arisen had such delivery
occurred.
(c) Conduct of Indemnification Proceedings. The
indemnified party shall give reasonably prompt notice to the indemnifying
party of any action or proceeding commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify the indemnifying
party (i) shall not relieve it from any liability which it may have under the
indemnity agreement provided in paragraphs (a) or (b) of this Section 10,
unless and to the extent it did not otherwise learn of such action and the lack
of notice by the indemnified party results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) shall not, in
any event, relieve the indemnifying party from any obligations to the
indemnified party other than the indemnification obligation provided under
paragraphs (a) or (b) of this Section 10. If the indemnifying party so elects
within a reasonable time after receipt of such notice, the indemnifying party
may assume the defense of such action or proceeding at such indemnifying
party's own expense with counsel chosen by the indemnifying party and approved
by the indemnified party, which approval shall not be unreasonably withheld;
provided, however, that, if the indemnified party reasonably determines that a
conflict of interest exists where it is advisable for the indemnified party to
be represented by separate counsel or that, upon advice of counsel, there may
be legal defenses available to it which are different from or in addition to
those available to the indemnifying party, then the indemnifying party shall
not be entitled to assume such defense and the indemnified party shall be
entitled to separate counsel at the indemnifying party's expense. If the
indemnifying party is not entitled to assume the defense of such action or
proceeding as a result of the proviso to the preceding sentence, the
indemnifying party's counsel shall be entitled to conduct the indemnifying
party's defense and counsel for the indemnified party shall be entitled to
conduct the defense of the indemnified party, it being understood that both
such counsel will cooperate with each other to conduct the defense of such
action or proceeding as efficiently as possible. If the indemnifying party is
not so entitled to assume the defense of such action or does not assume such
defense, after having received the notice referred to in the first sentence of
this paragraph, the indemnifying party will pay the reasonable fees and
expenses of counsel for the indemnified party. In such event, however, the
indemnifying party will not be liable for any settlement
11
<PAGE> 12
effected without the written consent of the indemnifying party. If an
indemnifying party is entitled to assume, and assumes, the defense of such
action or proceeding in accordance with this paragraph, the indemnifying party
shall not be liable for any fees and expenses of counsel for the indemnified
party incurred thereafter in connection with such action or proceeding.
11. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 10 is for any reason held to be unenforceable although applicable in
accordance with its terms, the Company and each Holder shall contribute to the
aggregate losses, liabilities, claims, damages and expenses of the nature
contemplated by such indemnity agreement incurred by the Company and each such
Holder, in such proportion as is appropriate to reflect the relative fault of
and benefits to the Company on the one hand and such Holder on the other, in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits to the indemnifying party and
indemnified party shall be determined by reference to, among other things, the
total proceeds received by the indemnifying party and indemnified party in
connection with the offering to which such losses, claims, damages, liabilities
or expenses relate. The relative fault of the indemnifying party and
indemnified party shall be determined by reference to, among other things,
whether the action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact, has been made by, or relates to information supplied by, the
indemnifying party or the indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action.
The parties hereto agree that it would not be just or equitable if
contribution pursuant to this Section 11 were determined by pro rata allocation
or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 11, no Holder shall be required
to contribute any amount in excess of the amount by which the total price at
which the Registrable Shares of such Holder were offered to the public exceeds
the amount of any damages which such Holder would otherwise have been required
to pay by reason of such untrue statement or omission.
Notwithstanding the foregoing, no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 11, each person, if
any, who controls a Holder within the meaning of Section 15 of the Securities
Act shall have the same rights to contribution as such Holder, and each
director of the Company, each officer of the Company who signed the
Registration Statement and each
12
<PAGE> 13
person, if any, who controls the Company within the meaning of Section 15 of
the Securities Act shall have the same rights to contribution as the Company.
12. No Other Obligation to Register. Except as otherwise expressly
provided in this Agreement, the Company shall have no obligation to the Holders
to register the Registrable Shares under the Securities Act.
13. Pledge of Shares and Units by Holders.
(a) Pledge. As collateral security for performance of their
respective obligations under the contribution agreements ("Contribution
Agreements") pursuant to which the Operating Partnership is acquiring interests
in certain properties, including five Class A office buildings, one retail
center and three residential development properties, each Holder hereby
pledges, assigns and transfers to the Company and the Operating Partnership a
first priority lien on, and continuing first priority security interest in, all
of the following property now owned or at any time hereafter acquired by such
Holder or in which such Holder now has or at any time in the future may acquire
any right, title or interest (collectively, the "Collateral"):
(i) its Pledged Interest (as defined below) and
all of its rights and powers under the Operating Partnership
Agreement and arising out of the ownership of the Common Stock,
(including, without limitation, all of its voting and other
rights in the Operating Partnership and the Company and all of
its right, title and interest in and to property, assets,
partnership interests and distributions under the Operating
Partnership and the Company);
(ii) all Accounts (as defined below) arising out of
its Pledged Interest;
(iii) all General Intangibles (as defined below)
arising out of its Pledged Interest;
(iv) all present future rights of such Holder to
receive any payment of money or other distribution or payment
arising out of or in connection with its Pledged Interest;
(v) any other property of the Operating
Partnership to which such Holder now or in the future may be
entitled in its capacity as a partner of the Operating
Partnership by way of distribution, return of capital or
otherwise;
(vi) any other claim which such Holder now has or
may in the future acquire in its capacity as a partner of the
13
<PAGE> 14
Operating Partnership against the Operating Partnership and its
property and the other partners thereof; and
(vii) to the extent not otherwise included above, all Proceeds (as
defined below) of any and all of the foregoing, including, without
limitation, whatever is received upon any collection, exchange, sale or
other disposition of any of the foregoing, and any property into which
any of the foregoing is converted, whether cash or noncash proceeds, and
any and all other amounts paid or payable under or in connection with
any of the foregoing.
(b) Definitions. For purposes of this Section 13:
(i) "Pledged Interest" means, with respect to each Holder, all
general and limited partnership interests in the Operating Partnership
held by such Holder, including Units, together with all certificates,
options or rights of any nature whatsoever that may be issued or granted
by the Operating Partnership to such Holder in respect of its Pledged
Interest and the shares of Common Stock held by such Holder identified
on Schedule 13(c) hereto; and
(ii) The terms "Accounts," "General Intangibles," and "Proceeds"
shall have the meanings assigned to such terms in the Uniform Commercial
Code from time to time in effect in the State of Maryland.
(c) Representations. Each Holder represents to the Company and the
Operating Partnership as follows:
(i) Such Holder is the record and beneficial owner of, and has
good and marketable title to, the Pledged Interests listed opposite its
name on Schedule 13(c), free of any and all liens or options in favor
of, or claims of, any other Person, except the lien and security
interest created by this Agreement. No security agreement, financing
statement or other public notice with respect to all or any part of the
Collateral pledged by such Holder is on file or of record in any public
office, except such as have been filed in favor of the Company and the
Operating Partnership pursuant to this Agreement.
(ii) The security interest in the Pledged Interest and other
Collateral granted by such Holder pursuant to this Agreement constitutes
a perfected first priority security interest in favor of the Company and
the Operating Partnership and is
14
<PAGE> 15
enforceable as such against all creditors of and purchasers
from such Holder. All action necessary or desirable to perfect
such security interest in each item of the Collateral pledged
by such Holder, including the filing of financing statements in
all appropriate public offices, shall have been duly taken on
or before the closing of the Offering.
(iii) The address of the chief executive office or residence
and principal place of business of such Holder is listed under
its name on the signature pages hereto.
(d) Covenants. Each Holder covenants and agrees with the
Company and the Operating Partnership that, from and after the date of this
Agreement until all obligations under this Agreement are satisfied:
(i) Further Documentation; Pledge of Instruments. At any time
and from time to time, such Holder at its expense will promptly
and duly execute and deliver such further instruments and
documents and take such further action as may be required by
applicable law, or as may be necessary or desirable, or that the
Company or the Operating Partnership may reasonably request, for
the purpose of obtaining or preserving the full benefits of this
Agreement and of the rights and powers herein granted. Without
limiting the generality of the foregoing, such Holder will
execute and file such financing or continuation statements, or
amendments thereto, and such other instruments, endorsements or
notices, as may be required by applicable law, or as may be
necessary or desirable, or that the Company or the Operating
Partnership may deem necessary or desirable in order to perfect
and preserve the liens created or intended to be created hereby.
Such Holder hereby authorizes the Company and the Operating
Partnership to file any such financing or continuation statement
without the signature of such Holder to the extent permitted by
applicable law. Copies of any such financing or continuation
statements shall be promptly delivered to such Holder. In
addition, simultaneously with the execution of this Agreement,
each Holder who owns Common Stock identified on Schedule 13(c)
shall deliver to the Operating Partnership certificates for such
shares of Common Stock, registered in the name of such Holder,
duly endorsed in blank or accompanied by stock powers duly
executed by the Holder in blank. If any amount payable under or
in connection with any of the Collateral shall be or become
evidenced by any promissory note, other Instrument or Chattel
Paper (as defined under the Uniform Commercial Code from time to
time in effect in the
15
<PAGE> 16
State of Maryland), such note, Instrument or Chattel Paper shall be
immediately delivered to the Company and the Operating Partnership,
duly endorsed, if appropriate, in a manner satisfactory to the
Company, to be held as Collateral pursuant to this Agreement.
(ii) Legend. The Operating Partnership Agreement shall be
legended with a notification of the pledges and security interests
created pursuant to this Agreement.
(e) Release of Collateral. The Collateral of each Holder shall
be released from the lien of the pledge and security interest created by this
Section 13 and returned to such Holder upon the expiration of the Lock-up
Period; provided, however, that if any claim has been asserted against a Holder
under the Contribution Agreements and remains unresolved upon the expiration of
the Lock-up Period, the Company and the Operating Partnership may retain
Collateral after such period and until such claim is resolved having a value
equal to 150% of the reasonably estimated amount of such claim.
14. Holder Representations, Warranties and Agreements.
Each Holder, jointly and not severally, and solely on behalf of itself,
represents and warrants to, and agrees with, the Company, that:
(a) Such Holder, if not a natural person, is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. Such Holder has all requisite power and authority to execute,
deliver and perform this Agreement. All necessary proceedings of such Holder,
if not a natural person, have been duly taken to authorize the execution,
delivery, and performance of this Agreement by such Holder. This Agreement has
been duly authorized by such Holder, if not a natural person, and executed, and
delivered by such Holder, and is the legal, valid, and binding obligation of
such Holder, and is enforceable as to such Holder in accordance with its terms.
No consent, authorization, approval, order, license, certificate, or permit of
or from, or declaration or filing with, any federal, state, local, or other
governmental authority or any court or other tribunal is required by such
Holder for the execution, delivery, or performance of this Agreement (except
filings under the Securities Act which will be made and such consents
consisting only of consents under Blue Sky or state securities laws which will
be obtained) by such Holder. No consent of any party to any contract,
agreement, instrument, lease, license, arrangement, or understanding to which
such Holder is a party, or to which any of such Holder's properties or assets
are subject, is required for the execution, delivery, and performance of this
Agreement which has not been obtained, and the execution, delivery, and
performance of this Agreement will not violate, result in a breach of, conflict
with, or (with or without giving of notice or the passage of time or both)
entitle any party
16
<PAGE> 17
to terminate or call a default under any such contract, agreement, instrument,
lease, license, arrangement, or understanding, or, if such Holder is not a
natural person, violate or result in a breach of, or conflict with, any law,
rule, regulation, order, judgment, or decree binding on such Holder or to
which any of such Holder's operations, business, properties, or assets are
subject, which, in any of such events, would prohibit, impair, or restrict the
ability of such Holder to execute and deliver this Agreement, perform in
accordance with the terms hereof, or consummate the transactions contemplated
hereby, or would adversely affect the rights or benefits, or both, hereunder
of any other party hereto.
(b) Neither such Holder nor any of such Holder's affiliates (as
defined in the regulations under the Securities Act), will take, directly or
indirectly, during the term of this Agreement, any action designed to stabilize
(except as may be permitted by applicable law) or manipulate the price of any
security of the Company.
(c) Such Holder shall promptly furnish to the Company any and
all information as may be required by, or as may be necessary or advisable to
comply with the provisions of, the Securities Act, the Exchange Act, and the
rules and regulations of the SEC thereunder in connection with the preparation
and filing of any Registration Statement pursuant hereto, or any amendment or
supplement thereto, or any Preliminary Prospectus or Prospectus included
therein. All information to be furnished to the Company by or on behalf of such
Holder expressly for use in connection with the preparation of any Preliminary
Prospectus, the Prospectus, the Registration Statement, or any amendment or
supplement thereto, will not include any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading.
15. Underwritten Registration.
No Holder of Registrable Securities may participate in any underwritten
registration hereunder unless such Holder (a) executes and delivers the
underwriting agreement or similar documents relating thereto pursuant to which
such Holder shall agree to sell, upon the terms and subject to the conditions
therein set forth, such Holder's Registrable Securities on the basis provided
therein, and (b) completes and executes all questionnaires, powers of attorney,
indemnities, custodial or escrow agreements and other documents as may be
necessary, advisable or required pursuant to the terms thereof or as may be
from time to time reasonably requested by the underwriter or underwriters named
therein, the Company, or their respective legal counsel, in connection
therewith.
In the event of any conflict between the indemnification and
contribution terms as herein set forth and as set forth in any underwriting
agreement entered pursuant hereto, the underwriting agreement shall control.
17
<PAGE> 18
16. Survival of Representations and Agreements
All representations, warranties, covenants, and agreements contained in
this Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the effective date of each Registration Statement contemplated by
this Agreement, and such representations, warranties, covenants, and agreements,
including the indemnity and contribution agreements contained in Sections 10 and
11 hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Company, any Holder, or any Person
which is entitled to be indemnified under Section 10 hereof, and shall survive
termination of this Agreement.
17. Amendments and Waivers. The provisions of this Agreement may
not be amended, modified, or supplemented or waived without the prior written
consent of the Company and the Holders of Registrable Shares, and, in the case
of Sections 2, 13 and 24 hereof, without the prior written consent of Merrill
Lynch.
18. Notices. Except as set forth below, all notices and other
communications provided for or permitted hereunder shall be in writing and shall
be deemed to have been duly given if delivered personally or sent by telex or
telecopier, registered or certified mail (return receipt requested), postage
prepaid or courier or overnight delivery service to the respective parties at
the following addresses (or at such other address for any party as shall be
specified by like notice, provided that notices of a change of address shall be
effective only upon receipt thereof), and further provided that in case of
directions to amend the Registration Statement pursuant to Section 3(e), a
Holder must confirm such notice in writing by overnight express delivery with
confirmation of receipt:
If to the Company: Crescent Real Estate Equities, Inc.
c/o Crescent Real Estate Equities Limited
Partnership
777 Main Street
Suite 2700
Fort Worth, Texas 76102
Attn: John C. Goff
Telecopy: (817) 878-0429
If to the Holders: As listed on the applicable Holder Signature
Page.
In addition to the manner of notice permitted above, notices given pursuant to
Sections 3, 7 and 8 hereof may be effected telephonically and confirmed in
writing thereafter in the manner described above.
18
<PAGE> 19
19. Successors and Assigns. This Agreement shall be binding upon the
parties hereto and their respective successors and assigns and shall inure to
the benefit of the parties hereto. This Agreement may not be assigned by any
Holder and any attempted assignment hereof by any Holder will be void and of no
effect and shall terminate all obligations of the Company hereunder; provided,
however, that any Holder may assign its rights hereunder to any person to whom
such Holder may Dispose of Shares and/or Units pursuant to Section 2(b) hereof.
20. Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
21. Governing Law. The Agreement shall be governed by and construed
in accordance with the laws of the State of Maryland applicable to contracts
made and to be performed wholly within said State.
22. Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provision in every other respect and of
the remaining provisions contained herein shall not be in any way impaired
thereby, it being intended that all of the rights and privileges of the parties
hereto shall be enforceable to the fullest extent permitted by law.
23. Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be the complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein, with respect to such subject matter. This Agreement supersedes all
prior agreements and understandings (except the Contribution Agreements)
between the parties with respect to such subject matter.
24. Third Party Beneficiary. Merrill Lynch shall be a third party
beneficiary or intended beneficiary to the agreement made by the Holders
pursuant to Section 2 hereof and shall have the right to enforce such agreement
directly to the extent it deems such enforcement necessary or desirable to
protect its rights hereunder.
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
CRESCENT REAL ESTATE EQUITIES, INC.
By /s/ JOHN C. GOFF
---------------------------------
Name:
Title:
CRESCENT REAL ESTATE EQUITIES
LIMITED PARTNERSHIP
By: CRESCENT REAL ESTATE
EQUITIES, LTD., its general
partner
By: /s/ JOHN C. GOFF
---------------------------
Name:
Title:
20
<PAGE> 21
REGISTRATION RIGHTS, LOCK-UP AND PLEDGE AGREEMENT
HOLDER SIGNATURE PAGE
Holder: Richard E. Rainwater
/s/ Richard E. Rainwater
--------------------------------------------
Print Name: Richard E. Rainwater
Address for Notice:
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: FW-Irving Partners, Ltd.
By: Rainwater, Inc., its general partner
/s/ Gerald W. Haddock
--------------------------------------------
Print Name: Gerald W. Haddock,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: MacArthur Center Partnership, Ltd.
By: Rainwater, Inc., its general partner
/s/ Gerald W. Haddock
--------------------------------------------
Print Name: Gerald W. Haddock,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: 777 Main Street Corporation
/s/ John C. Goff
--------------------------------------------
Print Name: John C. Goff,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: Mira Vista Investors, L.P.
By: Rainwater, Inc., a general partner
/s/ Gerald W. Haddock
--------------------------------------------
Print Name: Gerald W. Haddock,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: RRCC Limited Partnership
By: Rainwater, Inc., a general partner
/s/ Gerald W. Haddock
--------------------------------------------
Print Name: Gerald W. Haddock,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: 777 Main Holding, Ltd.
By: Tower Holdings, Inc.,
its general partner
/s/ John C. Goff
--------------------------------------------
Print Name: John C. Goff,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: RainAm Investment Properties, Ltd.
By Rainwater, Inc.,
its general partner
/s/ Gerald W. Haddock
--------------------------------------------
Print Name: Gerald W. Haddock,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: Rainwater, Inc.
/s/ Gerald W. Haddock
--------------------------------------------
Print Name: Gerald W. Haddock,
Vice President
Address for Notice:
------------------
777 Main Street, Suite 2700
Fort Worth, Texas 76102
Holder: LAS COLINAS PLAZA, LTD.
By: Rosewood Property Company
/s/ Paul E. Rowsey III
--------------------------------------------
Print Name: Paul E. Rowsey III,
President/Commercial Group
Address for Notice:
-------------------
500 Crescent Court, Suite 300
Dallas, Texas 75201
Holder: Rosewood Property Company
/s/ Paul E. Rowsey III
--------------------------------------------
Print Name: Paul E. Rowsey III,
President/Commercial Group
Address for Notice:
-------------------
500 Crescent Court, Suite 300
Dallas, TX 75201
<PAGE> 22
SCHEDULE A
777 Main Holding, Ltd.
777 Main Street Corporation
MacArthur Center Partnership, Ltd.
RRCC Limited Partnership
Mira Vista Investors, L.P.
RainAm Investment Properties, Ltd.
FW-Irving Partners, Ltd.
Rainwater, Inc.
Richard E. Rainwater
Las Colinas Plaza, Ltd.
Rosewood Property Company
<PAGE> 23
SCHEDULE 13(c)
HOLDER PLEDGED INTEREST
------ ----------------
777 Main Holding, Ltd. 505,080 Units, representing a 2.4%
limited partnership interest in the
Operating Partnership
777 Main Street Corporation 16,377 Units, representing a 0.1%
limited partnership interest in the
Operating Partnership
MacArthur Center Partnership, Ltd. 433,969 Units, representing a 2.1%
limited partnership interest in the
Operating Partnership
RRCC Limited Partnership 2,475,342 Units, representing a 12.0%
limited partnership interest in the
Operating Partnership
Mira Vista Investors, L.P. 617,392 Shares of Common Stock
RainAm Investment Properties, Ltd. 644,223 Units, representing a 3.1%
limited partnership interest in the
Operating Partnership
FW-Irving Partners, Ltd. 635,668 Units, representing a 3.1%
limited partnership interest in the
Operating Partnership
Rainwater, Inc. 1,600,000 Units, representing a 7.7%
limited partnership interest in the
Operating Partnership
Las Colinas Plaza, Ltd. 107,527 Units, representing a 0.5%
limited partnership interest in the
Operating Partnership
Rosewood Property Company 39,101 Units, representing a 0.2%
limited partnership interest in the
Operating Partnership
<PAGE> 1
EXHIBIT 23.01
CONSENT OF ARTHUR ANDERSEN LLP,
CERTIFIED PUBLIC ACCOUNTANTS,
DATED JANUARY 3, 1997
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in Post-Effective Amendment No. One to the
Registration Statement on Form S-3 (No. 33-92548) of our report dated February
2, 1996 included in Crescent Real Estate Equities, Inc.'s Form 10-K for the
year ended December 31, 1995, and of our reports dated March 11, 1994 on Caltex
House, June 30, 1994 on Regency Plaza One, August 16, 1994 on Waterside
Commons, September 9, 1994 on Two Renaissance Square, February 17, 1995 on East
West Properties, May 10, 1995 on MCI Tower and Denver Marriott City Center,
July 14, 1995 on Ptarmigan Place, November 17, 1995 on Albuquerque Facility
and The Hyatt Regency of Albuquerque, January 5, 1996 on Stanford Corporate
Centre, February 15, 1996 on 301 Congress, and July 19, 1996 on Greenway Plaza
included in Crescent Real Estate Equities, Inc.'s Forms 8-K and to all
references to our Firm included in this Post-Effective Amendment No. One.
Arthur Andersen, LLP
Dallas, Texas
January 3, 1997
<PAGE> 1
EXHIBIT 23.02
CONSENT OF KPMG PEAT MARWICK LLP,
CERTIFIED PUBLIC ACCOUNTANTS,
DATED JANUARY 3, 1997
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of The Crescent:
We consent to the incorporation by reference in the Post-Effective
Amendment No. One to the Registration Statement on Form S-3 (No. 33-92548) of
Crescent Real Estate Equities Trust (formerly known as Crescent Real Estate
Equities, Inc.) of our report dated February 28, 1994 relating to the combined
financial statements of The Crescent as of and for the year ended December 31,
1993, which financial statements are included in the Annual Report on Form 10-K
of Crescent Real Estate Equities, Inc. for the year ended December 31, 1995,
and the reference to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
January 3, 1997
<PAGE> 1
EXHIBIT 23.03
CONSENT OF HUSELTON & MORGAN, P.C.
CERTIFIED PUBLIC ACCOUNTANTS,
DATED JANUARY 3, 1997
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in Post-Effective Amendment No. One to the
Registration Statement on Form S-3 (No. 33-92548) of our audit opinion dated
February 13, 1995 and our review report dated December 28, 1995 as they relate
to the statement of excess of revenues over specific operating expenses for
Spectrum Center, Ltd. for the year ended December 31, 1994 and the nine-month
period ending September 30, 1995, respectively, as included in Crescent Real
Estate Equities, Inc.'s Form 8-K dated October 3, 1994, and to the reference to
our firm under the heading "Experts" in the prospectus.
Huselton & Morgan, P.C.
January 3, 1997
<PAGE> 1
EXHIBIT 23.04
CONSENT OF GRANT THORNTON LLP,
CERTIFIED PUBLIC ACCOUNTANTS,
DATED JANUARY 6, 1997
<PAGE> 2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have issued our report dated February 9, 1996 accompanying the
Combined Statement of Excess of Revenues Over Specific Operating Expenses of
Greenway Plaza, Ltd. and Nine Greenway, Ltd. appearing in the Crescent Real
Estate Equities, Inc. Form 8-K dated August 15, 1996 which is incorporated by
reference in Post-Effective Amendment No. 1 to the Registration Statement on
Form S-3 (No. 33-92548). We consent to the incorporation by reference in this
Post-Effective Amendment No. 1 to the Registration Statement of the
aforementioned report and to the use of our name as it appears under the
caption "Experts."
Grant Thornton LLP
Houston, Texas
January 6, 1997
